Central Bank downgrades growth outlook
“The Government should stick to the plan of €3.1bn in as growth-friendly way as possible,” said chief economist, Lars Frisell. “The risks of a lower adjustment are not that dramatic but it boils down to investor confidence and their view of debt sustainability.”
The chief economist added that, if the Government could find a growth-friendly way of introducing a budget that exceeded the €3.1bn then it should consider this option.
Mr Frisell noted that there were still many risks to the downside, including Ireland’s still very high debt levels and fragile growth.
“Even if we do full €3.1bn there is still a risk that the we may not reach the 5.1%.”
The Government says it is committed to reaching the 5.1% fiscal deficit target in 2014, but it will decide over the next few days whether this can be achieved through a lower nominal budget adjustment.
The Central Bank has lowered its growth forecast for this year and 2014. It previously guided GDP growth of 0.7% for this year, which it has revised down to 0.5% and sees GDP growth of 2% next year instead of 2.1%. GNP growth is forecast at 0.1% in 2013 instead of 0.3% and 1.2% next year, which has been revised down from 1.3%.
Exports will still lead to a recovery but, because of some softness in goods exports, there has been a downward revision. Domestic demand is seen as stabilising and inflation is set to remain moderate.
Moreover, there are signs of stabilisation in the jobs market. Employment is forecast to grow by 1.1% this year and 1.2% next year. The unemployment rate is expected to fall to 13.6% at the end of this year, which is down from 14.8% at the end of last year and 13% by the end of 2014.
The country is scheduled to exit the EU/IMF bailout programme in October. Mr Frisell says the biggest threat to a sustainable exit is the banking system and its potential inability to lend to the wider economy.
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