Central Bank lowers growth forecast amid oil fears and high US debt

GROWTH this year will be slower than previously anticipated and the Central Bank has cut its forecast for 2005 by 0.75% to 4.25%.

Fears oil prices could destabilise the world economy are a real danger and the bank is also worried that high debt levels in the US will hit the dollar.

That would change the economic landscape because a weaker dollar would undermine European growth as the eurozone would become less competitive, the bank warns.

But its message overall is positive. Domestic demand has been quite strong and the growth in personal consumer spending is picking up.

Employment growth remains strong and the reality is that the economy is at full employment. Tom O’Connell, assistant director general of the Central Bank, said a cause for concern has been the slowdown in exports reflecting a shift to a more “developed” economy.

In effect the services sector has become more prominent and consumer demand has also emerged as more critical in the overall economic landscape, he said, adding it is important we retain a manufacturing base where multinational firms account for about 140,000 jobs.

Productivity is also down considerably in the past two years.

Between 1996 and 2000 productivity accounted for almost half of GNP growth with employment making up the rest of the 9% annual average. In 2004 productivity was responsible for about 1% of the 4% GNP growth.

This year productivity will account for less than 1%, the bank said.

The export decline highlights slower multinational investment in Ireland.

This is reflected in the fact that the number of jobs being created is just about matching the jobs being lost.

But overall the bank says the global economic outlook continues to be robust, with world output to grow by more than 4% this year and next.

The US and China continue to be key drivers while recovery in Japan is becoming “self-sustaining.”

The bank’s forecasts are based on the price per barrel of oil averaging $65 for the current year. It believes the futures market suggests oil prices are not going to soften much.

Mr O’Connell says the economy does not require any pump priming in the Budget. Finance Minister Brian Cowen should aim for a balanced Budget, meaning there ought to be no borrowing for the 2006 Budget.

Mr O’Conell said that by the time 20005 is over the Government will have borrowed no more than a few hundred million for its 2005 Budget.

Allowing for the continuing rise in the tax take the Government will have enough to fund spending of about 7% above the 2005 level allowing it to meet its commitments, he said.