THE ECONOMY continues to contract but the pace of decline has decelerated, and a recovery seems possible later next year. The latest Central Bank quarterly report offers some hope that the worst of the economic downturn may now be over. Nevertheless, even with a return to growth starting in 2010, output will – in GDP terms – be some 14 per cent below that in 2007. Such a large reduction in economic activity represents one of the sharpest rates of decline of any economy in the developed world.
And three successive years of negative economic growth is without precedent in Ireland, since the compilation of national economic statistics began more than 50 years ago. As the Central Bank points out, the domestic economic outlook is still subject to huge uncertainty. And in the short term much will depend on the rate of recovery in the world economy, and whether it produces sustainable growth.
However, the Central Bank can, and does, point to some small encouraging signs to dispel some of the gloom encircling a depressed domestic economy. Retail sales have improved in recent months, having declined sharply earlier this year. The rise in unemployment has slowed relative to the rate of increase in the first quarter. Unemployment is likely to average 12 per cent in 2009 – better than the bank’s previous prediction – rising to an average of 14 per cent in 2010. And the inflation rate has turned negative to become deflation, which should help improve Ireland’s general price competitiveness in home and export markets.
Nevertheless, despite some modest positive indicators, the challenges facing the economy are formidable, as the Central Bank makes clear. It accepts the need to create a more stable and reliable tax base and to reduce public expenditure and bring it more into line with a restructured revenue base.
The bank supports much of what the Commission on Taxation has proposed, including property and carbon taxes and the introduction of water charges. It has also welcomed the McCarthy report as providing a “valuable framework” for deciding the major spending cuts that the Government must make to meet its commitment to achieve budget balance by 2013. In that context, the assistant director general of the Central Bank, Tom O’Connell, rejected the suggestion that Ireland should take a longer time period to reach the 3 per cent deficit set under the Stability and Growth Pact, as this would increase the national debt and involve higher interest payments.
The Central Bank report was completed before publication of the September exchequer returns last Friday. These figures suggest a likely budget deficit of 12 per cent of GDP by year-end, higher than the Government’s forecast in the April emergency budget. The bank favours spending cuts over tax increases to reduce the budget deficit, and cites the “lessons from Ireland’s experiences in the 1980s, and from international evidence” as indicating that this is the right approach. The December budget will prove a measure of the Government’s resolve.