Outlook ‘uncertain’ as spending to rise

CONSUMER spending is expected to strengthen this year but the outlook for 2011 is “shrouded by uncertainty”, according to IBEC.

The employer group said that while overall economic activity turned a corner earlier this year, the recovery is likely to be fairly muted for the remainder of 2010.

It said the strengthening of consumer spending is on the back of a relaxation of the very high savings rate which emerged last year. It said consumers will still face “considerable headwinds” over the coming months in the form of no wage growth, no net job creation and higher taxes.

IBEC expects the construction sector to see significant job losses of the order of 23,000 this year, with further loses likely in 2011, when employment in the sector will have more than halved from the 2007 peak.

It said that though some bounce-back will materialise from 2012 onwards, many of these jobs will have been permanently lost. Overall it expects employment levels in the public sector to fall to 2006-to-2007 levels.

It pointed out that in the final quarter of 2009, 89,000 people were unemployed for more than a year, the highest level since 1997.

On average, private sector pay rates are set to fall by a further 1% in 2010, according to IBEC’s latest economic forecast.

It expects the rate of inflation to increase by 1.8% in 2011. However, it said the price level in the economy will remain “well below” that recorded at the outset of the crisis for some time yet, and it is likely to be the end of 2013 or early 2014 before the inflation rate returns to the August 2008 level.

IBEC chief economist David Croughan said: “This means that despite the forecast re-emergence of annual inflation in the CPI later this year, there will be no cost of living justification for wage increases for some time yet.” Mr Croughan said improving international demand and the significant weakening of the euro in recent months have provided a much more positive environment for Ireland’s export sector.

“Net exports will make a positive contribution to growth during 2010. We have revised upwards our GDP growth forecast for 2010 from -0.7% to -0.1% and our 2011 forecast from 2.1% to 2.3%, since the last Quarterly Economic Trends in March.

“The outlook for consumer demand has improved since the start of the year and is now helping to lift the economy out of recession. We have revised upwards our outlook for consumer spending since our last forecasts in March.

“While at that time, we had expected that the absence of tax increases in Budget 2010 would ultimately boost consumer confidence, the recovery has been somewhat stronger than we expected,” he said.

Mr Croughan said IBEC and most business organisations in Europe welcomed the proposed increased surveillance at EU level over economic policy in member states. “Had such a system been in place at the outset of the single currency, arguably we might have avoided the economic imbalances that made the global economic crisis so much worse for Ireland. Caution rather than exuberance would have ruled the day and business would have had a more stable operating climate,” he said.