Central Bank raises 2012 forecast

The Central Bank has become slightly more confident on the Irish economy, predicting it will grow by 0.7 per cent this year, a marginal 0.2 percentage point increase from its previous forecast.

However, it has also revised upwards its expectations for unemployment, and now predicts that unemployment will stand at 14.7 per cent for the year.

In its quarterly bulletin published today, the bank asserted that the external environment "continues to be very challenging", but it did strike a note of optimism by revising upwards its forecast for GDP growth.

In its last bulletin, it expected gross domestic product (GDP) growth of 0.5 per cent for 2012, but it has now revised this up to 0.7 per cent.

"These revisions reflect a somewhat less negative outlook for domestic demand this year, which is offset by a less positive outlook for exports in both 2012 and in 2013," the bank said in its bulletin, although it notes that its forecast is subject to "a high degree of uncertainty mainly relating to the prospects for external demand".

However, the increase for 2012 is balanced by a decrease in its forecast for GDP growth in 2013, which it has marked down from 2.1 per cent three months ago to 1.9 per cent, with this growth taking place "against the background of some recovery in external demand and a broadly stable outlook for domestic demand".

The bank's forecast for a narrower measure of economic activity, gross national product (GNP), has also improved for 2012. It now expects the contraction in this measure to moderate, with a decline of 0.3 per cent forecast for 2012, compared with 0.7 per cent three months ago. It has however also revised downwards its forecast for GNP for 2013, down from 1 per cent to 0.9 per cent.

The Central Bank has revised upwards its forecast for unemployment, expecting the rate to reach 14.7 per cent for 2012, up by 0.3 percentage points from its previous forecast three months ago. It is also forecasting unemployment to remain elevated in 2013, with only a slight improvement, at 14.4 per cent next year, up from its previous forecast of 14.0 per cent.

The bank expects that outward migration, which has mitigated the impact of falling employment on unemployment rates, will be less significant both this year and next, as participation rates, which declined sharply in recent years, show signs of recovery.

Elsewhere the bank pointed to some positive points.

"Despite the difficult external environment and continued sluggishness domestically, good progress is being maintained on the principal policy issues," the bank said in its report, citing the banking sector, which has been "somewhat less affected to date by external developments than might have been expected".

It noted that the domestic banks' dependence on central bank funding "has actually tended to decline slightly, although it remains elevated".

Inflation is set to fall back to 1.4 per cent this year according to the Central Bank, down from its last forecast of 1.5 per cent, "mainly reflecting the lower assumptions for international oil prices" as well as restrained consumer spending.

Given that the bank predicts disposable incomes to continue to decline in 2012, with little change in the savings rate, it is forecasting a decline in consumer spending of about 1.6 per cent for 2012, with a "slight decline" of about 0.1 per cent forecast for 2013.