Lower growth for 2008

As Minister for Finance Brian Cowen prepares to finalise next week's Budget, the Central Bank governor John Hurley has downgraded slightly his forecast for economic growth in 2008.

Speaking at the Finance Dublin Securitisation conference yesterday, Mr Hurley said he expected the economy to grow next year by "some 3 per cent or so". In its most recent quarterly bulletin, published last month, the Central Bank forecast GDP growth of 3.5 per cent in 2008 and GNP growth of 3.25 per cent.

Explaining the figure provided yesterday, a Central Bank spokeswoman said Mr Hurley was "allowing for some marginal moderation" in next year's growth.

The governor said that the financial turmoil in global money markets and the broad repricing of risk had "tilted the balance of risks to euro area growth to the downside". This is expected to lead to less pressure on the European Central Bank (ECB) to raise interest rates.

He said the ECB governing council has "made it clear that it is determined to ensure that inflation expectations remain firmly anchored". He said the council has signalled that it needed "to gather additional information and assess new data, including new projections due in early December, before drawing further conclusions for monetary policy".

Mr Hurley said the volatility in the financial markets was "likely to persist, at least into the early part of 2008". He said recent developments in financial markets, such as the temporary closure of the covered bond market, pointed to a further tightening in liquidity and "reinforce the view that there is still some way to go before we see a return to more normal market conditions".

"Uncertainty is likely to remain high and confidence will only return to markets when the impact on larger institutions and, indeed, their responses, becomes clearer. Until we reach that point, markets may continue to remain fragile and vulnerable . . . "

He said recent unfavourable developments "increase the risk of a more significant spillover from financial markets to broader economic activity". Underlying economic fundamentals remained favourable "with strong employment growth boosting household incomes and corporate balance sheets quite healthy".

However, he said the likelihood must be that global economic activity "could not remain immune" from a more significant slowdown in the US.