Central Bank drops economic growth forecast to 2.5%

THE Central Bank has lowered its Irish economic growth forecast for next year to just 2.5%.

In 2003, the bank says Gross National Product which excludes profits made by multinationals located in Ireland, will increase by 2.5%, much lower than the forecast of 4.25% three months ago.

Tom O'Connell, the Central Bank's head of economic research said the 2.5% estimate was "optimistic" and was prone to downside risks hinging on the performance of the US economy and recovery was being hampered by the uncertainty over war in the Middle East.

Inflation is expected to decrease slightly to 4.25% next year according to the bank, mostly caused by the 0.5% cut in interest rates by the European Central Bank earlier this month.

Although, inflation is predicted to fall back slightly, it is still an area of grave concern said the bank.

"We have had poor inflation since 1999 and there is not much sign of it getting better," said Dr Michael Casey, assistant secretary general yesterday at the publication of the bank's quarterly economic bulletin.

"Prices are about 9%-12% above the eurozone average which has serious implications for our competitiveness. We are not talking about maintaining competitiveness anymore, we are talking about restoring it which is much more difficult."

Dr Casey added that low inflation was good for sustainable growth of all economies and achieving the ECB's aim of each member reaching inflation of around 2% was still a goal.

Concern over the growth in mortgage lending compelled the bank to write to all financial institutions warning them not to relax the rules on lending and the bank sad yesterday it would carefully monitor the responses.

"People shouldn't take on borrowings thinking that the recent low interest rates will continue indefinitely," said Tom O'Connell.

Mortgage lending has accelerated sharply between the first quarter of this year when it was running at a rate of 15.6% and the third quarter when it was running at 23.5%, the bank said.

Jobs growth next year is expected to fall back further to just 1%, even less than the 1.25% this year.

The prospect of job creation stalling at 1% is a far cry from employment growth of 6% just three years ago when the economy was in better shape.