Central Bank predicts 2.1% growth in economy in 2014

The Irish economy is forecast to grow by 2.1 per cent this year as consumer spending and business investment increases.

The Central Bank’s first quarterly bulletin for 2014, published today, said the need for fiscal consolidation remained the biggest challenge for the economy, while restoring bank soundness and growing employment by increasing competitiveness were also essential to ensure growth.

Gross domestic product (GDP) is expected to grow by 2.1 per cent this year, revised upwards from 2 per cent in its last bulletin, as households increase spending on items such as cars and furniture for the first time since 2010. GDP growth will rise to 3.2 per cent next year.

Gross national product (GNP), which measures the value of Irish-only businesses, is expected to grow 2.2 per cent this year and 2.5 per cent in 2015.

The Central Bank also forecasts a significant fall in unemployment from 13.2 per cent last year to 11.9 per cent this year, followed in 2015 by a drop to 11 per cent.

The economy added 58,000 jobs in the year to September, recouping 18 per cent of jobs lost during the crisis, but there was little evidence of pay increases despite improved economic performance, the report said.

“On the contrary reductions in hourly pay, which were rare even when employment losses were greatest during 2010 and 2011, have recently become a feature of the data,” it said.

Moderate wage growth has helped to restore some of the competitiveness lost in the boom, but further improvements in productivity and competitiveness would help to boost Ireland’s growth potential, the report recommended.

GDP growth was held back in the first half of 2013 as some pharmaceuticals came off patent and a slowdown in trading partner countries affected other exports, but economic activity appears to have picked up in the second half of the year.

The growth in employment is also likely to improve consumer confidence, the bulletin said, and “modest positive growth” in consumer spending of around 1 per cent is projected for 2014, with a 3.5 per cent growth in exports.

Public finances

The debt-to-GDP ratio has peaked at a slightly lower level than previously expected, the Central Bank’s projections indicate, with latest estimates suggesting the deficit for 2013 will come in below the 7.5 per cent GDP target set under the European Commission’s “excessive deficit procedure” monitoring system.

“While these are welcome developments, deficit and debt levels remain very high and further consolidation is needed in coming years to put debt firmly on a downward path and secure sustainability,” the report warned.

“Through reducing uncertainty, this should contribute to a faster and more lasting recovery and also reinforce the confidence of international lenders and further improve access to market funding.”

Banking sector

The report also called on banks to work harder to ensure sustainable long-term arrangements are made with borrowers in arrears. Although liquidity and funding conditions have improved, the report said, further progress was needed to resolve impaired loans.

“While progress has been slow, momentum is building and the Bank continues to work to ensure that banks and mortgage borrowers in arrears move to conclude durable solutions,” it said.

“The Bank is also monitoring ongoing steps to cure and resolve legacy debt problems of small firms.”

Continuing to make progress on fiscal and banking issues and enhancing productivity and the competitiveness of the economy is the best way to ensure that the emerging improvement in economic conditions can be sustained, it concluded.