THE CENTRAL Bank has predicted that the economy will grow by between 2 and 3 per cent next year, well above most expectations for the euro zone as a whole.
The crisis in the euro zone, which peaked in May, does not appear to have damaged Ireland's growth prospects, according to the bank's Quarterly Bulletin.
In its first economic forecast since the bailing out of Greece and the putting in place of a rescue fund for other weak euro zone countries, the bank argues that Ireland’s recovery remains on track.
The bank recognises the elevated levels of uncertainty associated with forecasting in the current environment, and these concerns were underscored just hours after the release of the report when Irish retail sales figures became available from the Central Statistics Office.
In June, sales declined on May by all major measures. This was the third consecutive month-on-month decline in the value of core retail sales.
When measured by volume (which strips out the effects of price changes), it was the second consecutive decline.
The numbers suggest that the modest rebound in retail spending in the first months of the year has run out of steam.
The uncertainty about the outlook was compounded by figures from the US which showed that the pace of recovery in the world’s largest economy slowed in the April-June quarter.
Even if the Irish economy does return to solid growth in 2011 as anticipated, the Central Bank does not expect any significant increase in jobs or a fall in unemployment.
In common with other recent forecasts by the ESRI and the IMF, the Central Bank anticipates a “jobless recovery” over the next 12 months.
Of these three forecasters, it is the most pessimistic on employment, believing that a further net decline of 6,000 jobs will take place in 2011.
The ESRI, meanwhile, expects a fall of 2,000, while the IMF is relatively bullish, believing that the numbers at work will grow.
On the forthcoming budget, the Central Bank believes that the path set out by the Government is correct and that a more aggressive approach to tackling the deficit is not warranted at this point.
Echoing the IMF’s recent statement, it called on the Government to set out in detail the spending cuts and tax increases it will introduce in each of the years to 2014. This, the bank states, would strengthen the credibility of the budget consolidation process among those who lend to the Government on international markets.
Central Bank officials acknowledged that their forecast for economic growth in 2011 is considerably lower than that on which the Department of Finance is basing its budget projections and that this could require additional tightening measures in the future.
On the detail of the bank’s economic outlook, it now expects gross national product (GNP) to contract in 2010 by 1 per cent. In its April forecast, it pencilled in a contraction of 1.5 per cent. It revised upwards its gross domestic product (GDP) forecast by a greater margin. Whereas in April it expected this measure of economic activity to fall by 0.5 per cent, it now expects an expansion of 0.8 per cent.
For 2011, the bank has marginally revised downwards its GDP forecast, to 2.2 per cent. Its GNP forecast is unchanged on April.
GDP, unlike GNP, is heavily influenced by highly volatile returns on international investments. Traditionally in Ireland these have been dominated by the profits of foreign-owned multinational corporations. The difference between GNP and GDP has grown ever wider in recent years.
The Central Bank downplayed the significance of the changes as they largely reflect the GDP/GNP numbers for the first quarter of 2010, released in early July. The bank stressed that its view on the outlook for the economy is broadly unchanged. This is reflected in the very limited adjustments to other aspects of its forecasts, such as employment, inflation and the public finances.