ANALYSIS:Central Bank's latest bulletin shows modest improvement in economic conditions, writes PAT McARDLE

THE GLOBAL recovery has continued with economic activity increasing at a stronger than expected pace. However, the upturn is still expected to be both uneven and modest in the major economies, according to the Central Bank's latest Quarterly Bulletin.

The better external outlook, combined with some improvement at home, has prompted the bank to make another modest upgrade to its forecast for GNP growth this year (see table). It still sees a contraction on average over the course of the year, but the estimated fall in national income has been pared back to 1.5 per cent from 2 per cent in its previous report last January.

We should be thankful for such a small mercy - a year ago, the projected decline was a much greater 3.5 per cent. Improvements are evident in virtually all areas, but some are more important than others.

When allowance is made for their relative weight or importance, it is clear that the bulk of the uplift comes from the external sector.

Growth in exports has been revised up and imports down, a double whammy which more than accounts for all of the revision.

By comparison, the changes made on the domestic side have a relatively modest impact.

For the first time, the bank has produced forecasts for 2011.

Here they are a bit tardy and it would be a useful demonstration of public sector productivity if they were to start producing these longer-term forecasts a couple of quarters earlier.

While growth is expected to resume in the second half of this year, this only becomes evident in annual terms in 2011 when GNP is forecast to expand by 2.4 per cent.

This is at the low end of the 2.5-3 per cent range they guided back in January.

Things are getting better but many people, especially central banks, are cautious. The 2.4 per cent figure compares with 3 per cent in last December's budget.

This dovetails with the key message conveyed by the bank. Their comment section concludes with a more extensive than usual section on the public finances.

This notes that "in the current international environment, it is more important than ever to adhere strictly to the agreed fiscal consolidation plan" to ensure continued access to funds, eg, foreign borrowing, on good terms and to "avoid being classified amongst those countries whose fiscal situation is the most worrying".

This is a barely concealed reference to Greece, where the situation is becoming more alarming by the day. There is also no guarantee that we will continue to escape the fallout.

The bank ups the ante by calling on the Government to set out in greater detail the nature of the further adjustment measures planned for future years.

The Government has already told us that it intends to raise taxes and cut current spending by a further €2 billion in each of the next two years, although this may not be generally appreciated. Certainly the teachers and other public servants calling for their wage cuts to be rescinded appear to be unaware of this reality.

Presumably, the bank wants the Government to get a move on regarding the property tax and other taxes that are coming down the track.

The Government's room for manoeuvre on the spending side is becoming quite restricted.

Having just done a deal with the unions, which rules out further pay cuts, perhaps unwisely, they are unlikely to cut social welfare again. This leaves them with only the rump of day-to-day spending available for the chop.

The real sting in the bank's comment comes when it refers to the average growth of about 4 per cent between 2011 and 2014 assumed in the budget and notes that "the Government must stand ready to take further action if growth is weaker than assumed".

This call is timely in advance of the votes on the public sector wage deal, but shocking in the glimpse that it gives us of a vista which is almost too appalling to contemplate.

The bulletin contains a useful discussion on trends in competitiveness and price levels.

We are making useful progress in these areas, with wages falling here while they continue to increase elsewhere.

However, there is a focus on unit labour costs, which are of dubious value, given that the statistics incorporate productivity gains in the multinational sector which are likely to be more apparent than real.

GDP was boosted last year by strong exports of pharmaceuticals, but the associated profits were reflected in higher than usual factor income outflows. We badly need a series of competitiveness indicators that are not distorted by such factors.

The bulletin includes a section which compares price levels here with those abroad. For consumer goods, Ireland had the highest price level in the euro area in 2008 and we are still likely to be in second place this year.

In the case of both health and education, Irish prices were 50 per cent above the EU 27 average. While this will not come as a great surprise to anyone who buys their pills in Spain, it is still a shocking reminder of how uncompetitive we are. Mary Harney scored a notable success with the pharmacists - we need more of the same if the appalling vista of even greater than anticipated fiscal cutbacks is to be avoided.