Economy ‘set to recover’ from recession

EXPORT-led growth will pull the economy out of recession in the second half of this year.

For 2010 overall the economy will remain in recession, however, with a GDP fall of 1% on the cards, a significant improvement on the 7% loss of growth experienced in 2009, according to the Central Bank’s first quarterly bulletin for 2010.

From mid-2010 the bank expects the economy to move into modest growth year-on-year, but it will be 2011 before the economy delivers a calendar year of growth, following two years of sharp decline in 2008 and 2009.

Next year should see output rise by between 2.5% and 3% in the economy, it said. The bulletin forecasts consumer spending will fall again this year, with any recovery likely to be “slow and gradual”. It warned wage restraint must become the norm if the Irish economy is to recover.

The report also points to certain costs that are continuing to undermine the economy overall.

It criticised professional fees which “remain very high in Ireland”. It identified healthcare, health insurance, utilities and public transport for costing too much relative to other countries.

“Greater competition and regulation is needed in a range of sectors,” here it said.

In its first quarterly bulletin of the year, the bank agrees with the emerging consensus that the economy will start to grow again in the second half of this year, as growth in export markets improve. Unemployment is expected to average 13.5% this year, somewhat better that perviously forecast, it said.

Employment is also set to fall and will not start to stabilise until the more solid economic growth expected to emerge next year starts to take hold.

Any improvement in jobs will lag the pick up in the economy, said Maurice McGuire, assistant director general of the bank.

Overall, the bank said the quality and the extent of the recovery will hang on cost competitiveness. Pay restraint must become the norm across all sectors of the economy if competitiveness is to be restored and growth sustained, said McGuire.

That requires further cuts “for those on the average industrial wage and for those on one and a half times the average industrial wage” to make a real impact on the competitiveness issue, he said

Looking ahead, the bank said future growth must come from internationally traded activities and not “unbalanced domestic developments”, by which it meant property booms.

It warned too that despite the setting up of NAMA to take over struggling property and land loans from the major Irish banks, the sector will continue to suffer further losses in that area.

That will require fresh capital injections, which the state has pledged to meet if necessary.

How much extra it will have to inject will depend on assets valuations and the losses those loans are likely to incur going forward, said the bank. Also critical to that figure will be the “appetite of private investors for buying into the banks”, it said.

The bank warned that much work needs to be done if the economy is to get back to trend growth in the future.

Keeping a grip on the national finances was vital, and it noted that the state still has to find cuts of a further €6.5 billion over the next few years to get our deficit back to 3% of GDP, in compliance with EU rules.