Central Bank: Prepare for tougher measures

THE Government must be prepared to take tougher measures than planned to keep the national finances on track if its growth assumptions fail to materialise, the Central Bank warned yesterday.

And the Central Bank believes it will be next year before the economy is growing strongly enough to create jobs.

The Government’s adjustment plan projects economic growth of about 4% between 2011 and 2014.

If those figures fall short the Central Bank’s latest quarterly bulletin said: “The Government must stand ready to take further action if growth is weaker than assumed.”

The bulletin said that an “impressive start has been made” and that “it would enhance confidence further to set out in somewhat greater detail the nature of the further adjustment measures planned for future years”.

Assistant director general Maurice McGuire said the bank was not questioning the growth assumptions made by the Government, but pointed out, however, that the European Commission said in a comment after the plan was submitted to Brussels that “greater detail” should be forthcoming from the Government on what it intended to do under the plan to get the national finances back in line with EU guidelines.

The EC has also described the future for growth as “somewhat optimistic”, he said.

Mr McGuire said the bank was not overly concerned about the growth figures as such but it was important for the Government to state clearly that “they would take necessary steps to make further corrections” in the event of weaker than projected growth being delivered over the crucial period of adjustment the economy is having to go through.

The report warned that “any slippage would be certain to damage confidence, both internationally and domestically”.

If we stick to the targets set out, Ireland will “avoid being classified among those countries whose fiscal situation are the most worrying”.

Substantial cuts in Government spending, including pay cuts for public workers, has helped keep a lid on the premium investors charge to hold its debt, even as problems mount in Greece. The yield spread between Greek and German 10-year bonds has widened more than 100 basis points in the past month to exceed 400 basis points (4%), while the equivalent spread for Ireland has risen just 4 basis points to 138 over the same period.

Recently the National Treasury Management Agency said it expected the premium Ireland has to pay for the money it borrows compared to Germany will fall below 1% before the year end.

On the economic front, the Central Bank is sticking to the view the country will pull out of recession in the second half of this year.

A further decline of 0.5% in expected for the full year, following a fall of 7.1% in 2009.

For 2011, the bank said GDP growth of 2.4% is on the cards.

While the bank is optimistic the economy is starting to turn the corner it expects unemployment will peak at about 14% by the year end, giving an average rate of 13.7% for the year and falling to 13.2% in 2011.

Competitiveness remains a key issue, and while some ground has been made up though fling wages and other factors, the country is still uncompetitive relative to the “core economies” with which it has to compete.