IN ITS LATEST quarterly bulletin, the Central Bank outlines a broadly encouraging forecast for the economy in 2010. The end of the economic downturn is in sight and a “gradual and modest” recovery is likely in the second half of the year. The economy, having declined by an estimated 11 per cent in GNP terms in 2009, is expected to contract by a further two points this year before positive growth on a full year basis is achieved in 2011.
All economic forecasts are predicated on certain key assumptions. The Central Bank is assuming that progress already made in achieving a better fiscal balance, which has seen the budget deficit stabilised, can be sustained. But the strength of that economic recovery, the bank is keen to stress, will also depend on how well other economic and financial challenges are overcome. One major issue is wage competitiveness. A reversal of the losses experienced in this area in recent years is needed to underpin future growth and to sustain economic recovery.
Pay cuts in the private and public sectors have already begun the painful – but necessary – adjustment process. And pay restraint in both these sectors will remain a key requirement in maintaining cost competitiveness. In this respect the Central Bank also endorses the view of the National Competitiveness Council in its recent report that professional fees remain very high in Ireland and that greater competition and regulation in a range of sectors, such as healthcare, health insurance, utilities and public transport is needed. Yet, there is little evidence to date that the Government is willing to tackle these aspects of the competitiveness challenge.
The second assumption on which the Central Bank has forecast a return to positive growth is the improving state of the world economy. There, a stronger than expected recovery in the second half of last year has prompted an upward revision of global growth forecasts for 2010. In consequence, modest growth in domestic exports is expected to lift the economy out of recession later this year.
Given the very sharp rate of contraction in the Irish economy – an estimated peak to trough decline of some 13 per cent in economic activity over two years – the Central Bank has sought to place this recession in perspective in an historical context.
It notes that real living standards here remain high by international standards and are “much higher than they were a generation ago”. On a comparative basis, income per head in Ireland was just more than two-thirds of the EU average in the 1980s, reached 110 per cent at the peak of the boom and, the bank estimates, will level off at 90 to 95 per cent.
However measured, the impact of the recession has been painful and difficult for many: whether in terms of job or income losses or otherwise. The prospect of economic recovery later this year offers hope and encouragement. But, realistically, the pace of that recovery will be largely determined by external developments that remain outside our control.