Central Bank warns Government over fiscal stance

The Central Bank has said momentum in the economy continues to build and broaden but it has warned that the Government’s fiscal stance should not fan cyclical pressures.

The bank’s observations come as Dublin campaigns with the EU powers to press ahead with an increase next year in public expenditure but without breaching European spending guidelines.

The Government received a boost for its claims overnight when the Irish Fiscal Advisory Council backed a “limited departure” from European spending curbs in 2016 .

In its spring forecast this morning, the Central Bank delivered a modest upgrade to its growth projection this year on back of strengthening demand in the domestic economy. However, it eased its 2016 forecast by a similar amount.

“GDP growth of 3.8 per cent and 3.7 per cent is projected for 2015 and 2016 respectively, representing an upward revision of 0.1 per cent for this year and a downward revision of a similar amount for next year,” the bank said.

“Risks to these forecasts are tilted slightly to the upside, largely reflecting upside potential from domestic factors and the impact of exchange rate movements.”

The bank said the continued strong increase in investment spending has been supported by the beginning of a recovery in consumer spending, which is showing signs of gradually strengthening.

“The pick-up in consumption has benefitted from continuing favourable labour market developments, in particular growth in employment, which is helping to boost incomes.”

While the bank said Ireland is making progress to overcome the legacy of the crash, the challenge now was to ensure the emerging recovery delivered a sustainable return to steady growth and increasing employment.

“To achieve this outcome, policy needs to focus on reducing remaining vulnerabilities and strengthening resilience in order to minimise future risks to economic, fiscal and financial stability,” the bank said.

Ahead of first quarter exchequer returns on Thursday, the bank said recent data signals favourable developments in the public finances and that Ireland is on course to exit “excessive deficit procedure” on schedule this year.

The procedures is a European policy mechanism under which euro zone countries are obliged to take corrective action to bring budget deficits within the EU limit of 3 per cent of economic output.

“ While planned budgetary adjustment has been the main driver of the improvement in the fiscal position over time, the improving economic performance and interest bill reductions have come to play a more prominent role, offsetting spending overruns in 2014,” the bank said .

“With relatively strong economic growth in prospect, it is important that the fiscal stance does not exacerbate cyclical pressures. Steady progress towards the medium-term objective of budget balance in structural terms (that is, adjusted for the economic cycle) would help ensure this.

“Moreover, it would also help ensure that the level and burden of public debt, which still remains very high, would be reduced to lower and safer levels.”

The bank said it assumed that “contract manufacturing” outside Ireland for Irish-registered multinationals delivered a step increase in exports and imports last last year “and not a lasting upward shift in their growth rates”.

It assumed, therefore, that exports will return to growing broadly in line with projected growth in external demand.

“Given Ireland’s trade links with the more strongly growing US and UK markets and the potential impact of ECB quantitative easing on euro area growth and the euro exchange rate, exports are projected to grow at a relatively strong rate.”