THE ECONOMY will shrink by 8.3 per cent this year and contract by a further 3 per cent in 2010, when unemployment will peak at “15 per cent plus”, according to the latest projections from the Central Bank.
The outgoing governor of the Central Bank, John Hurley, said there may be “some recovery” in the economy in the second half of next year after an “extraordinarily difficult” 2009, but the “gradual” return to better economic fortunes would not take proper hold until 2011.
“That’s our best shot,” he said at the launch of the Central Bank’s annual report in Dublin yesterday.
Mr Hurley said improving Ireland’s economic competitiveness was critical to containing the loss of jobs, adding that the Central Bank had been “heartened” by the speed of the economy’s response to the crisis.
“There are some very welcome signs of realism in the economy, across all sectors . . . If we continue along these lines, there is a possibility a recovery could happen quicker.”
Asked about a reduction in public sector numbers, Mr Hurley said he believed “there will have to be some expenditure reductions”. “We have a lower GDP, a smaller cake to redistribute, so I think all sectors of the economy will have to contribute,” he said. “All parts of the public sector will have to accept levels of pain.” The Central Bank plans to take on extra staff in the years ahead to beef up its skills before the organisation is merged with the Financial Regulator under a new system of regulation.
Mr Hurley, who retires from his post in September, denied the Central Bank could have done more to warn about the dangers of the overheating economy, and said it had made strong warnings in its annual reports over the years.
“All of the risks that have come to fruition were referred to in those reports. In 2006, we talked about the very significant increase in indebtedness, we talked about how the property market was no longer supported by fundamentals – a very strong statement by a central bank at the time,” he said. “We didn’t change behaviour and I think that is the issue we need to focus on. Why was behaviour not changed?”
Responding to Mr Hurley’s comments, Fine Gael deputy leader and finance spokesman Richard Bruton said that the failure to regulate the banking sector was “a failure to act”, not a failure of identify the problems.
“The unmistakeable conclusion is that the Government was at the centre of a web which simply did not want to know about the massive risks being taken with the Irish economy,” Mr Bruton said.
Mr Hurley said that removing problem property loans from the banks through the National Asset Management Agency (Nama) “bad bank” process would lead to consolidation in the financial sector.
He said the two main banks, Allied Irish Banks and Bank of Ireland, needed to be strong but the rest of the sector had to be configured to the economy’s needs. Nama would be “a catalyst” to a “very different” financial system and banks could emerge “leaner” and “smaller”.
He said valuing the loans moving to Nama was “crucial” and must strike a balance between restoring the banking sector and value for the taxpayer. This endorses the view that some loans may be valued at a less severe “through the cycle” value.