THE OUTLOOK for economic growth this year and next has worsened in recent months, according to the Central Bank’s latest forecasts.

In its Quarterly Bulletin, published yesterday, the bank also stressed that the budget would need to be “reprogrammed” to take account of the weaker outlook.

Although Maurice McGuire, assistant director general, was reluctant to offer advice to the Government, he said successful budgetary adjustments internationally in the past had focused on cuts on expenditure rather than increases in taxes. He said cuts were more controllable and increases in tax led to negative incentive effects and increased tax avoidance.

The bank’s forecasters now believe the economy will be weaker in 2010 and 2011 compared with its last forecast three months ago.

The bank has slashed its 2010 forecast for gross domestic product (GDP). In July, it had expected modest GDP growth of almost 1 per cent this year compared with 2009. Now it believes the economy will barely grow at all in 2010.

On the gross national product (GNP) measure, which excludes returns on foreigners’ investments in Ireland and those on Irish residents’ investments abroad, the bank expects a contraction of 1.7 per cent this year, considerably more severe than the 1 per cent it had anticipated in July.

For 2011, the bank foresees the economy growing in GDP and GNP terms, although it has cut its forecasts as the year has progressed (see chart). Mr McGuire said the forecasts were based on a budget adjustment in 2011 of €3 billion. A larger adjustment would dampen growth further but this would likely be limited, as there were offsetting effects of front-loading the adjustment, such as lower interest rates and a boost to confidence by setting out a more credible strategy.

The bank is now more upbeat about exports, but more downbeat about the domestic economy.

Since July, it has raised significantly its forecasts for export growth in both 2010 and 2011.

The bank finds no evidence that the Government’s debt crisis in the euro zone has dented the recovery, but sees clear signs that the wider global recovery is showing signs of cooling. As a result, the bank expects the rate of export growth to slow slightly in 2011 on 2010 although both rates are higher than in its July forecast.

Spending by households on consumer goods and services is expected to be only marginally weaker than previously anticipated in 2010, but considerably more sluggish in 2011.

In July, the bank believed that private consumption would grow by just under 1 per cent in 2011. That was cut by more than half, to just 0.4 per cent, yesterday.