Value of External Trade - % Year-On-Year

Central Bank - Bulletin 4 2007

 

The Irish Central Bank today published its fourth Quarterly Bulletin of 2007. The Bulletin indicates that the domestic economy continues to perform solidly in the current uncertain international environment following a period of high growth.

This is underpinned by a good budgetary position, strong employment growth and an adaptable economy. It reports, however, that the impact of recent financial market turbulence on the international as well as the domestic economy remains difficult to assess at this stage, and the extent to which growth in Ireland's main trading partners may be affected is not yet fully clear.

The Bank says that forecasts from the major international economic institutions suggest that the economic impact of the recent turbulence will be greatest in the US. Within the euro area, while recent business and consumer surveys have softened, sentiment remains broadly positive and available data for the third quarter has been generally favourable. The resilience of the euro area economy should also be helped by the fact that it was growing solidly before the recent outbreak of market turbulence. However, as is the case for the rest of the global economy, the broad re-pricing of risk in financial markets has tilted the balance of risks to activity to the downside.

Allowing for these factors, both GNP (Gross National Product) and GDP (Gross Domestic Product) growth in the Irish economy this year are forecast to be in the region of 4.75% per cent, given the relatively strong start to the year. This is forecast to be followed by somewhat lower growth next year, of about 3.25 per cent GNP (3.5 per cent GDP), mainly reflecting slower domestic demand growth. This is likely to be accompanied by an easing in inflationary pressures and some limited rise in unemployment.

As already noted, the Bank says that there are external risks, in particular any slowdown in growth in the US economy, with which Ireland has close trade and foreign direct investment links, could have an impact and high oil prices and significant exchange rate movements, maybe as part of a correction of global imbalances, could affect the outlook. The Bank said that the important point is that the responses of domestic social partners and policymakers ensure that the adverse effects of such factors are minimised and that economic growth continues at a satisfactory rate.

The easing in domestic demand and consequently in overall growth in the economy is expected to contribute to a reduction in domestic inflationary pressures in 2008. This should lead to some easing in the services component of inflation, in particular. The HICP (Harmonized Index of Consumer Prices) is expected to rise by 2.25% per cent next year compared with 2.75 per cent in 2007 and 2.70 per cent in 2006.

The Central Bank says that the target set in the Budget for the General Government Balance in 2007 was a surplus of 1.1 per cent of GDP compared with a 2.9 per cent surplus in 2006. To a large extent, however, this reduced surplus reflects the loss of what can be termed 'windfall' gains from the unusually strong performance of the property market, rather than a structural loosening of fiscal policy.

The Bank says that it would be desirable to aim for a surplus in the General Government Balance once again next year. This would ensure that, in the event that adverse developments result in lower than expected growth, the fiscal position could accommodate this, without the need for immediate corrective action.

Developments in residential output and property prices this year indicate a move towards a more sustainable position. Prices have eased and the supply of new houses is also adjusting to meet new market conditions. The Central Bank says that it is noteworthy, however, that rents are continuing to rise quite strongly, by 12 per cent year-on-year according to the latest HICP data for August. This suggests that the underlying demand for housing in the economy remains strong reflecting continuing income and employment growth. 

In line with the moderation in both house prices and the output of new housing, the rate of overall credit growth in the economy has continued to decelerate from a peak of over 30 per cent in June of last year to just over 20 per cent in July of this year. A further easing in credit growth is expected through the remainder of this year and into next year.