Adverse swings in the euro exchange rate remain a major risk to competitiveness, requiring a high degree of flexibility on the part of the Irish business sector, the Central Bank warned today.
Since joining European Monetary Union in 1999, Ireland's competitiveness has disimproved by 14%, according to today's Quarterly Bulletin for Winter 2003, released by the ICB and Financial Services Authority of Ireland.
In 1999, the weak exchange rate of the euro cushioned Ireland against price discrepancies, but the strengthening of the currency since than has seen price levels rise 12% above the European Union average.
Compared with other eurozone countries, a high proportion of Ireland's external trade is with countries outside the eurozone, so the US Dollar and Sterling exchange rates are of particular importance.
There is still a risk of large movements in exchange rates, the ICB added.
The Bulletin also said there were signs of improvement in the international economic environment and corresponding evidence of recovery in the Irish economy.
Gross National Product growth in 2003 is expected to be 2.25% (GDP 1.75%), gradually picking up to about 3% (GDP 3.5%) in 2004.
House prices are still a cause for concern, it warned.
While noting the slowdown in the rate of increase, the ICB cautioned that house prices are still relatively strong in the context of more subdued economic growth, employment increases and the improving outlook for inflation.
Ireland's inflation rate has been declining in 2003 but the objective must be to reach the 2% target rate set by the European Central Bank for the eurozone countries.
Increases in wage costs in several sectors were described as a 'worrying development' in the Bulletin, despite employment growth remaining positive.
Unemployment at around 4.75% for 2003 was still half the eurozone average.
On the international front, the Winter Bulletin states that the US economy seems set to continue to lead global expansion in 2004.
The ICB expressed its concern, however, about the long-run sustainability of global economic growth against the background of still sizeable US economic imbalances.