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Central Bank cuts 2012 growth forecast

Friday, October 05 11:38:03

The Central Bank today cut its GDP growth forecast for the economy for this year, citing falling demand globally but said that Ireland has made strong progress in its efforts to return to the bond markets.

Its latest Quarterly Report said GDP was expected to slow to 0.5pc growth in 2012 compared to a previous estimate of 0.7pc while GNP is expected to contract by 0.4pc.

That is expected to be followed by a pickup in growth next year to around 1.7pc in GDP terms and 0.7pc in GNP terms.

It said that, in recent months, signs have emerged of a more marked slowdown at the broader international level, as the dampening impact of the strains in financial markets is felt.

The report predicted that it is unlikely that there will be a return to employment growth before the end of next year at the very earliest while higher energy prices will keep Irish inflation at or above 2pc.

"The small and open nature of the Irish economy, allied to the dependence on export growth to offset domestic economic weakness, makes the economy more vulnerable to a weakening in the external economic environment," the bulletin said.

Turning to Ireland's efforts to regain the bond market, it said that Ireland's strong adherence to EU/IMF Programme targets and promised and actual initiatives at euro area level, recent months have seen a significant fall in Irish bond yields and, while still tentative, a regaining of access to market funding by the Irish sovereign.

The significant improvement in market sentiment towards Ireland over the Summer owes much to the statement issued following the EU Summit in late June, recognising the imperative to break the vicious circle between banks and sovereigns and, specifically, the need to deal with Ireland's banking-related debt, the Central Bank said.

"Encouragingly, at the euro area level, market sentiment has also improved markedly since August, benefitting from the signals sent and steps taken by the ECB to put in place a new framework for intervention in bond markets. However, while recent developments have positive implications for the financing of governments and banks, risks remain, both at the European and domestic levels."

At home, continued adherence to the Programme targets remains essential while, both here and elsewhere, progress on the resolution of euro area sovereign debt and banking problems will have a crucial bearing on how the wider environment evolves."

The report went on to talk about public service pay.

It said pay levels remain too high in the public and private sectors, which it warns is discouraging expansion and investment by exporters.

Reducing pay, it says, would make a significant contribution to improving competiveness and productivity.

A recovery in consumer sentiment is expected to contribute to a stabilisation in spending this year, but a modest decline is predicted for next year.