Irish
Central Bank says Ireland’s export performance remains consistently below the growth of demand in our export markets indicating worrying deterioration in competitiveness
By Finfacts Team
Oct 12, 2006, 13:21

Irish Central Bank Governor John Hurley

Looking ahead to 2007, growth is projected to remain strong, with both GNP and GDP expected to increase by 5½ per cent, also a small increase on previous forecasts.  The economy is expected to be able to continue to absorb the relatively strong increase in the labour force and remain at close to full employment, with unemployment remaining in the range of 4 to 4½ per cent.  As regards inflation, the HICP for 2006 is forecast at 3 per cent (4 per cent CPI) , falling to 2¾ per cent (3¾ per cent CPI) in 2007.

The Central Bank says that while the outlook for the Irish economy remains benign, possible issues arise from the pattern of growth. Domestic demand has played a large part in economic growth in recent times, with  investment boosted by strong increases in housing output.  There are signs now that this increase may be levelling off, based on indicators such as housing starts and planning permissions.  Nevertheless, the current scale of activity in the sector is such that it remains  vulnerable to a shock to the economy, such as a sudden loss of competitiveness. 

Increases in house prices remain a concern and affordability issues have become more pressing. However, there have been tentative signs, from both housing indicators and anecdotal evidence, of some easing of price pressures in recent months.  Higher interest rates and the increased supply of housing now seem to be acting to moderate house price increases.  If the current easing in house price inflation were to continue over the coming months, it would reduce the risk of a sharp correction and contribute to a soft landing in the housing sector.

Related to the sharp rise in house prices, has been an increase in the overall level of indebtedness. This high, and still increasing, level of indebtedness constitutes a risk to the macroeconomic environment as well as to individual borrowers and lenders.

Ireland’s export performance remains consistently below the growth of demand in our export markets, indicating a worrying deterioration in competitiveness relative to our trading partners.  In the short-term, wage and price pressures need to be kept in check, while it will be important to improve productivity performance across both the traded and non-traded sectors of the economy over the longer term.   Improving the efficiency of both the production and use of energy will be key factors for the future competitiveness and productivity of the Irish economy.

The Bank says an area of particular concern has been the rise in inflation during 2006, with a differential emerging between Irish and euro area HICP inflation. This rise partly reflects the impact of external factors such as the high level of global oil prices, but, more importantly, stronger domestic inflationary pressures. 
In the light of this, a broadly neutral budget for 2007 – targeting a small surplus similar to the likely outturn for this year – would be appropriate in helping to contain domestic inflationary pressures.  In addition, continuing steps to increase competition in the economy are also required.

A number of external risks are also evident.  A continuing risk to the world economy is the possibility of a disorderly correction of the US current account deficit and there is emerging evidence of a cooling of the US housing market.  Uncertainty in global oil and commodity markets continue to pose risks for supply and prices. 

International and eurozone economy

The Central Bank says that the pace of global economic growth strengthened further in the first half of 2006, and there are signs that global growth has remained strong in the third quarter.  This mainly reflects the impact of improving domestic demand in the eurozone and Asia, which has more than offset the dampening influence of increases in oil and commodity prices.  The US economy expanded very strongly in the first quarter of 2006, but growth has slowed there since then.

The euro area economy has gained significant momentum over the course of 2006 with the pace of recovery proving stronger than expected.  Euro area GDP expanded at its fastest pace in six years in the first half of the year and growth forecasts for 2006 have been revised upwards. Encouragingly, the recovery has also broadened out.  Domestic demand made a very strong contribution to GDP growth in the first-half of the year, with investment contributing particularly strongly.   After several years of subdued growth, consumer spending also picked-up in the first-half of the year, though not as strongly as investment.  With regard to the outlook, growth prospects in the near term continue to look bright, though, beyond that, there are some downside risks linked to the potential for a rebound in oil prices and the possibility of slower global growth.

With regard to inflation, while oil price developments have led to some volatility in the headline rate, risks to the outlook for price stability have remained consistently on the upside.  These risks have come to include the potential for further increases in oil prices, the risk of a stronger pass-through of past oil price rises into consumer prices, additional increases in administered prices and indirect taxes and the risk of stronger than expected wage developments, as economic growth and employment have gathered momentum.  To contain these risks, the Governing Council has twice raised interest rates in recent months, bringing the main refinancing rate to 3.25 per cent.   The Governing Council indicated that, if its assumptions and baseline scenario are confirmed, it will remain warranted to further withdraw monetary accommodation.