Central Bank says economic downturn worse than expected

The economic downturn is worse than expected with no guarantee of a gradual recovery, the Central Bank warned today.

But the outlook should pick up next year if public spending is tightened up, the housing market recovers and the global slowdown improves, it believes.

John Hurley, Governor of the Central Bank and Financial Services Authority of Ireland, said despite immediate hardships the country should be back on track in the medium-term.

“However, such an outcome is not guaranteed and will require concerted action,” he said, launching the Central Bank’s annual report.

Mr Hurley said it was changing its forecasts for the next year and a half because the economic slowdown and inflation were significantly worse than anticipated.

The housing slump and its knock-on impact on rising unemployment will also continue to damage the country’s growth this year, according to the report.

The Central Bank is now forecasting that joblessness should rise to an average of about 6%.

Ireland’s woes at home have been sharpened by difficulties internationally, particularly in the US and the UK, which both have strong economic ties with the country.

But things will improve if property prices and sales return to more sustainable levels during next year and if there is an improvement abroad, said Mr Hurley.

“Growth should pick up next year on the basis of a bottoming out in domestic housing output and some improvement in the external environment,” he said.

Although Ireland is not immune to the global financial turmoil and credit crunch, there was no sign of rising loan arrears among the public, according to the report.

The Central Bank said high street and commercial banks here remain healthy and strong and have performed well in stress tests to measure their ability to absorb financial shocks.

Mr Hurley has urged a tightening of public finances, continued spending on main infrastructural projects, greater competition in some sectors of the economy and a realistic approach to wages by everyone.

In a separate report, the Central Statistics Office (CSO) revealed that inflation – the annual hike in the cost of living – rose to 5% last month, up from 4.7% in May.

Rising airfares, soaring petrol and diesel prices, an increase in hotel and guest accommodation tariffs were among the main factors driving inflation upwards.

Higher mortgage interest repayments and higher home heating oil costs, as well as the rising price of a packet of cigarettes, were also to blame, said the CSO.