Central Bank urges further pay cuts

PAY REMAINS high in both the public and private sectors in Ireland and needs to fall further, the Central Bank has said in its latest quarterly bulletin.

It also called on the Government to do more to front-load its budgetary adjustment in order to lessen the uncertainty that has plagued the economy. There should be no “procrastination”, the bank’s economists said yesterday.

In its latest economic forecast, contained in the bulletin, the bank’s economists predicted that gross domestic product would grow by 0.5 per cent, lower than the 0.7 per cent forecast three months ago.

The bank also said that gross national product, which excludes the impact of multinationals on the economy, will shrink by 0.4 per cent, slightly less than the 0.3 per cent contraction predicted in the last quarterly bulletin.

The Central Bank attributed the revision to a “less favourable outlook” for external demand.

“This reflects a more protracted than expected slowdown in virtually all of Ireland’s main trading partners, which seems likely to extend into the first half of 2013,” the report said.

A similar revision was applied to forecasts for next year, with the pick-up in GDP growth expected to reach 1.7 per cent and GNP to expand by a modest 0.7 per cent. That compares with growth of 1.9 per cent and 0.9 per cent respectively in the last bulletin.

The bank said the growth was dependent on some recovery in external demand and stabilisation of the domestic economy.

Although domestic demand is set to shrink further this year, the pace of decline is expected to slow and next year is expected to see a stabilisation. “Consumer demand remains weak, weighed down by declining disposable incomes and a high level of precautionary saving,” the report said.

“However, there are signs of incipient recovery in consumer sentiment which should contribute to a gradual stabilisation in consumption expenditure over the next year, although a further modest decline is projected for 2013 as a whole.”

The decline in investment is also likely to moderate “significantly” in 2012, and may grow next year. The bank said it would be next year before any employment growth starts to emerge.

Repeating a call made previously, the report on the state of the economy said that “without increasing the overall scale of fiscal correction, there is a case for getting the adjustment over more quickly”. “This would shorten the already lengthy period of uncertainty which has been bad in itself and has doubtless slowed investment and other spending plans,” it concluded.

At a briefing yesterday the bank’s economists would not be drawn on how much of the adjustment scheduled for subsequent years should be brought forward to Budget 2013.

The bank also repeated its earlier warnings that the economy had not regained the competitiveness lost during the bubble era. It said pay remained high, adding to costs and prices in the economy, “and no doubt discouraging expansion and investment projects by exporting firms”.

“While the difficulties of addressing some of these issues are acknowledged, a lowering of the cost base, both public and private, would make a significant contribution to improving competitiveness and productivity in a fundamental way,” the report stated.

Siptu reacted angrily to the bank’s call for a further cut in labour costs. “The problem with our economy is not that wages or spending is too high, said union president Jack O’Connor. “It is that consumer demand continues to fall through the floorboards precisely as a result of the pursuit of this nonsensical approach which reflects an ongoing attempt to resolve the problems created by those at the top of society through crucifying people on middle and low incomes.”