The Central Bank has cut its growth forecast for this year from 5.5 per cent to 4.25 per cent. The bank is also forecasting a similar level of growth for next year but has warned employment growth will be considerably lower in 2006 as activity in the construction sector slows.
Echoing calls made by the International Monetary Fund (IMF) on Monday, the bank called on Minister for Finance Brian Cowen to run a "balanced budget" next year. The bank predicts inflation to remain low due to the recent softening of oil price rises and a lack of so-called "second round effects".
Yesterday's forecast, published in the Central Bank Quarterly Bulletin, is the latest and most conservative of a series of forecasts produced in the wake of recent oil price rises. The bank's latest forecast for Gross Domestic Product (GDP) - the measure of goods and services produced in the economy - is almost 1.5 percentage points lower than the ESRI's latest forecast, and threequarters of a percentage point lower than that of the Department of Finance.
But it is comparable to forecasts released simultaneously on Monday by employers' group Ibec and the IMF. Presenting the forecasts, Tom O'Connell, assistant director general for economic policy, said global economic growth remained strong, driven by US and Asian economies, but risks to its forecast remained "downside" due to higher oil prices.
Although oil prices would stabilise at higher levels, the Central Bank believed inflation was likely to remain low.
"There is no sign of second round effects. But as European Central Bank (ECB) President Jean-Claude Trichet said, we need to remain vigilant," Mr O'Connell said. The ECB recently toughened the tone of its language, suggesting that it is more concerned than before about euro zone inflation.
The Central Bank forecasts GDP growth to rise to 4.75 per cent next year, but for employment growth to fall to 2.25 per cent, compared with 4 per cent this year, as the construction sector's contribution to employment declines.
Addressing the declining contribution of manufacturing and exports to growth, Mr O'Connell said this was not necessarily a cause for alarm. "Export volume falls are partly a correction from the very high levels achieved in previous years . . . If labour resources move to the services sector then this may imply a shift of resources from the manufacturing sector," he said.
But he repeated earlier warnings about the exposure of the economy on strong rates of credit growth. "At present rates of credit expansion, the size of personal debt is almost doubling every three years," Mr O'Connell said.
The Central Bank called on the Government to balance its next budget so that so-called "automatic stabilisers" could work freely in the event of a downturn in the economy. Automatic stabilisers occur as the tax and welfare system injects money into the economy in bad times and withdraws it in good times through the effect of unemployment on tax revenues and welfare payments.