Unemployment could increase again next year if there is any delay in the US-led global economic recovery predicted for the early part of 2002, the Central Bank has warned.
Jobs in Irish-owned manufacturing industry would be the most vulnerable in such a scenario, the Bank said yesterday in an otherwise upbeat assessment of the economy's prospects for next year.
If the US economy does not bounce back by the middle of next year, the number of people out of work could jump by 50 per cent from its current level of just over 4 per cent, according to the Bank's assistant director general, Mr Michael Casey.
Even with the predicted recovery, unemployment here is expected to peak at 5 per cent in the third quarter, said the Economic and Social Research Institute (ESRI), which also published its economic forecasts for 2002 yesterday.
Economic growth has slowed to l per cent or less, according to the two organisations which are the best regarded public sector economic commentators. The Bank is the more downbeat of the two, saying yesterday that "short-term indicators suggest that growth may have effectively ceased in the past two quarters".
Mr Casey was at pains to point out this did not amount to saying the economy is in recession. "We would not want to read too much into that . . . people should not loose confidence," he said. The ESRI believes the economy is currently growing at around 1 per cent or less.
Both bodies are assuming a swift return to economic growth next year, as long as the US economy recovers. The ESRI predicts that Gross National Product - the value of everything produced in the economy less money repatriated by multinationals - will grow by 2.1 per cent, while the Central Bank is predicting GNP growth of 3.5 per cent. The bulk of the growth will come towards the end of the year.
The difference between the two forecasts is primarily due to different assumptions about interest and exchange rates next year. As a member of the European Central Bank (ECB), the Central Bank is not allowed to make public predictions concerning interest rates or exchange rates and when making its forecast it assumes they will remain unchanged.
Mr Casey said yesterday the Bank's estimate was optimistic "but we are sticking to it". He added that the economy will "fairly quickly" get back to its long-term potential annual growth rate of 5 per cent.
The ESRI is free to make whatever predictions it wants about interest and exchange rates and said yesterday that the ECB will cut rates early next year, after which they will start to move upwards as the economic recovery takes hold.
The institute is also expecting the euro to recover from its present level of near 90 US cents to near parity with the dollar by the middle of next year. Most economists working in financial services would consider this an unrealistic assumption given the problems facing the European economy.
The Central Bank and the ESRI base their expectation of a speedy US recovery on a number of factors, the main one being the confidence of the US authorities that they have acted swiftly and appropriately by cutting interest rates 11 times this year. The ESRI also points out that since the second World War, US recessions have, on average, lasted 11 months and the current dip is officially nine months old.
The impact of US economic growth on Ireland would be swift and dynamic. "An improvement in export demand would kick-start growth and contribute to domestic demand," said Mr Casey yesterday. Both bodies were ambivalent about the recent Budget which the ESRI termed "mildly stimulatory" while the Bank dubbed it as "moderately expansionary". The Bank expects the Budget to add 1 per cent to inflation which will be 4.5 per cent next year.
