The Irish economy is “over the worst” and is now “bubbling along at the bottom,” the assistant director general of the Central Bank Tom O’Connell said today when introducing the bank’s latest quarterly bulletin.
The bank said gross domestic product will fall by 7.8 per cent this year but that there is a “prospect of a return to growth during 2010”.
It said the first quarter of this year was the most severe phase of the economy’s contraction but that since then the pace of decline has moderated. Mr O’Connell said investment and consumer spending would both probably still be low in 2011. “We can’t be too bullish.”
On wages and competitiveness, the bank said it is expected that Irish wage rates will decline by 2.4 per cent this year and 1.3 per cent in 2010, facilitating reductions in unit labour costs of 2.5 per cent and 3.4 per cent respectively, at a time when such costs were still rising in the euro area generally.
The Central Bank warns that although hopes are rising that the downturn in the broader international and European economies may have reached a turning point, Ireland’s recovery from recession will lag behind most other countries.
However such a readjustment would not compensate for the loss of competitiveness which occurred earlier in the decade.
The bank said there is a need to return the banking sector to health, restore order to the public finances, and regain competitiveness.
The bulletin did not contain any endorsement of the National Asset Management Agency (Nama) but Mr O’Connell said this was an oversight. “We approved it so it is implicit that we think it is a good thing,” he said.
He said he did not believe extending the amount of time in which Ireland would seek to return to a 3 per cent budgetary deficit was a good idea, as this would have the effect of increasing the national debt and the associated interest payments.
Referring to the report on potential cuts in the public sector by economist Colm McCarthy, Mr O’Connell said the report, in his view, “makes a lot of sense”.
Taking more money out of the economy did involve risk, but it could also create confidence in the private sector. “And we don’t have too many choices. We are borrowing €20 billion a year.”
The bank said there is a need to do more in relation to public expenditure, and in relation to expanding the tax base. Mr O’Connell noted that both public sector pay and social welfare payments, doubled in size in the 2001 to 2007 period.
Mr O’Connell also spoke strongly about what he said were excessively high fees charged by professionals such as dentists, general practitioners and accountants. Such fees had been allowed grow to “ridiculous levels”, he said.
“The Government is a near monopoly” in terms of buying many professional services, he said. “If times are tough, they should drive a really hard bargain.”
It said Ireland's return to grown is dependent on our main trading partners’ economic recovery, which should help to support growth in Irish exports. However, it added that domestic demand is likely to remain weak until 2011 at the earliest.
The bank stated that while economic practices in Ireland prior to 2007 were largely to blame for the recession, the country would not have escaped the impact of the global downturn.
It said the sharp and sudden set-back which has been experienced should not be allowed to obscure the solid strengths and tangible economic achievements of recent years.
It adds that the speed an extent of economic recovery will also depend on how quickly competitiveness can be restored in Ireland.
"A strategy to restore competitiveness must encompass action on a number of fronts including pay and non-pay costs, infrastructure improvements which support productivity growth, the enhancement of competition in sheltered sectors, continuing to encourage innovation and R&D activity and enhancing the skill levels of the labour force."
While much of the bulletin makes for depressing reading, it does finish on a relatively upbeat tone.
"In spite of a very turbulent economic environment, many of the strengths of the Irish economy remain in place, not least in terms of a highly educated and adaptable workforce, a relatively flexible economy and a significant comparative advantage in high productivity modern sectors," it said.
"If we follow the appropriate policy path, the economy has the potential to grow solidly again in the medium-term," it added.