The Central Bank said no further stimulus was required to boost the Irish economy as it called for steps to strengthen its resilience to crisis.
In a forecast yesterday which said momentum in the economic recovery continues to build and broaden, the bank warned the Government’s fiscal stance should not fan cyclical pressures.
Chief economist Gabriel Fagan said further consolidation in the order of €1 billion per year would be required to eliminate the structural deficit in the public finances, which is an estimate of the permanent deficit net of cyclical and temporary measures.
“There is not a case for fiscal stimulus to boost the economy – that might even exacerbate conditions in the economy,” Mr Fagan told reporters.
Growth patterns
“We have an economy which last year grew by nearly 5 per cent. We have an economy which is expected to grow by nearly 4 per cent this year and next. We have an economy is which employment is growing by 2 per cent per annum, in which unemployment is expected to fall below 9 per cent in 2016.
“So from a purely demand management point of view, there is little case for fiscal stimulus.” His “key message” was that there was a requirement to build more resilience into the economy.
“In addition to policy measures taken in the past, in more recent times the fiscal position has benefited a lot from strong economic growth. However, this is not the end of the road. There is a need for further consolidation,” he said.
“From an economic point of view, the level of debt, although it has fallen, is still very high by international standards and it means that the economy would be vulnerable to adverse shocks should those shocks materialise.”
The bank delivered a modest upgrade to its growth projection this year on the back of strengthening demand in the domestic economy, but it said there was little change in the overall outlook from its last forecast in February.
“GDP [gross domestic product] growth of 3.8 per cent and 3.7 per cent is projected for 2015 and 2016 respectively, representing an upward revision of 0.1 per cent for this year and a downward revision of a similar amount for next year,” the bank said.
“Risks to these forecasts are tilted slightly to the upside, largely reflecting upside potential from domestic factors and the impact of exchange rate movements.”
The forecast comes as the Coalition campaigns to persuade the EU powers to press ahead with an increase next year in public expenditure without a breach of spending guidelines. The Irish Fiscal Advisory Council has declared support for a “limited departure” from spending curbs in 2016.
Asked if it was a good idea for the Government to seek flexibility in the application of EU budget rules, Mr Fagan said that was beyond the bank’s mandate.
Fiscal consolidation
“Of course there is a legitimate debate about potential growth and how you actually compute that. For us the main message is that the Government continues with the process of fiscal consolidation in line with the rules,” he said.
In its forecast, the bank said the continued strong increase in investment spending has been supported by the beginning of a recovery in consumer spending, which is showing signs of gradually strengthening.
“The pick-up in consumption has benefited from continuing favourable labour market developments, in particular growth in employment, which is helping to boost incomes.”
While the bank said Ireland was making progress to overcome the legacy of the crash, the challenge was to ensure the emerging recovery delivered a sustainable return to steady growth and increasing employment.
