The bank said in its quarterly report that inflation remained a worry, and forecast a rate of 4.75% for the year.
Despite the uncomfortable report, Central Bank assistant director general Tom O’Connell said however that Ireland’s economic performance was still “very good by international standards”. Other analysts concurred, forecasting that Ireland’s average growth rate will be around 5% over the next two years, adding that this would be double that of the average growth in other countries in the Euro zone.
The Central Bank report partially blamed Ireland’s dependence on oil imports for high inflation, which is now the highest of any Euro currency economies.
“The economy’s high dependence on imported oil, along with strong growth domestically, has brought about the re-emergence of an inflation differential with the euro area. This is worrying as the Irish price level has increased relatively rapidly and is now the highest in the euro area, while productivity growth in the economy is noticeably weaker than earlier in the decade and no longer significantly in excess of the euro area average,” the report concluded.
Productivity growth in the economy was weak. Coupled with high inflation damaging competitiveness, this had “muted” export performance, leading to a worsening in the balance of payments between exports and imports.
“Taken together, the growth of exports of goods and services has tended to lag behind world export market growth in recent years. This implies that Irish exports have lost market share, and this is reflected in a deterioration in the balance of payments current account. This could become problematic if it were to persist or become larger. In the long term, it would be difficult to maintain growth rates at a high level or increase incomes per capita in a situation where the exporting sectors of the economy are not performing well,” the report warned.
Referring to the large number of high-profile job losses, particularly in blue-chip multinationals in high-tech industries, the report suggested some of these may have been specific to the companies involved.
“Job losses, as well as gains, are an ongoing feature of any economy and some of the recent job losses also seem to reflect difficulties specific to particular firms. The priority must be to ensure that a favourable business climate remains supportive of new business and employment creation, and that employees have the training and skills to match new employment opportunities,” the report noted.
The Central Bank also warned of the “high dependence of recent output and employment growth on the construction sector.
“While it is understandable that resources have been moved into this sector in recent years, it is equally clear that the rate of expansion of the sector in recent times cannot be maintained. There are already signs that housing output may have reached its peak and is starting to decline somewhat. However, in the short term, planned increases in spending on infrastructure and strong non-residential construction imply that overall output of the construction sector will remain at a high level,” the Bank said in its report.
The report says that while house prices are “leveling off”, housing output will remain strong with more than 80,000 completions possible, meaning an increase in mortgage credit. Personal credit, “which is now close to one and a half times disposable income, is likely to rise further relative to income in 2007, albeit at a slower pace that in the recent past”, the bank says.
Meanwhile Irish Enterprise minister M