The Irish economy can recover from the global economic downturn but the era of the Celtic Tiger is now over, the governor of the Central Bank, Mr Maurice O'Connell, has declared. Calling for low wage rises, Mr O'Connell said Ireland's competitiveness could become "difficult" if the euro strengthened against the dollar and other major currencies in coming months.
Inflation is falling, but "there is no room for complacency", he said. "Domestic inflationary pressures remain strong and there is still a danger that high wage settlements might sustain inflation beyond acceptable levels," he warned.
Questioned about the short-term outlook by the Oireachtas Joint Committee on Finance and the Public Service, he said: "This is a time of great economic uncertainty that is without parallel in the more recent past." After years of "outstanding economic performance", Ireland is now set for much more modest rates. "For the first time in several years it is growing below its long-term potential," he declared.
This year's "very creditable" 6.5 per cent growth rate was partially based on "a substantial carryover effect from the exceptionally high growth rate last year of 10.5 per cent", said Mr O'Connell. The Central Bank's 2001 economic predictions, which were revised down by a percentage point to 3.5 per cent in the wake of the September 11th terrorist atrocities, may have to be cut again, he said.
A slowdown this year was "inevitable", regardless of global events. "The economy was overheating seriously and such high rates of growth could not be sustained. However, the scale and the spread of the slowdown that we are experiencing at the moment demonstrates how fragile our position can become and how vulnerable we are to outside shocks."
Irish inflation next year, according to the EU's HICP scale, could be 3.75 per cent, or lower. "Ireland is no longer at the top of the league table on inflation in the euro area." House price rises have "finally come to a halt, for the time being at least", though the issue could continue to be "a big factor" in wage demands.
He dismissed more optimistic predictions offered by some economic commentators that the world economy will make a so-called V-shaped recovery in the early months of next year. The US downturn began early this year, but was exacerbated by September 11th. "The initial expectations were that the US had slipped into a V-shaped, downturn from which it should recover quickly. This prospect did not materialise. It had been generally accepted, even before September, that recovery would be more delayed."
The most optimistic prediction now is that the slowdown is near the bottom point and that, with the aid of tax benefits and a relaxation of monetary policy, there will be a gradual recovery after the early months of 2002. Most analysts, however, would now emphasise that the risks are on the downside and that recovery could be delayed considerably," he said. US unemployment jumped by 415,000 during October.
"This is a sobering reminder of how fragile the US economy has now become. Obviously if the downturn intensifies, the impact will be more severe and it will probably have knock-on effects throughout the Irish economy. In such circumstances, it would be unlikely that growth could reach 3.5 per cent next year."
A rise in the euro's value, which is predicted by many experts, would prove to be "a particularly difficult challenge" for Irish-owned industries, which cannot match the productivity gains achieved by high technology companies. He rejected criticism of the European Central Bank because it has not cut interest rates "more aggressively". "The Bank has never hesitated to act when the time was right," he said.
