Quarterly Economic Commentary (Winter 2002)

December 20, 2002

News

Quarterly Economic Commentary (Winter 2002)

Daniel McCoy, David Duffy, Adele Bergin, Joe Cullen

Some of the main findings of the analysis include:

  • While the outlook for the Irish economy remains uncertain, it is estimated to have grown by 4.3% in real GDP terms and by a more modest 2.2% in real GNP terms in 2002. Our forecast growth in 2003 is for real GDP growth of 3.8% and 3.0% in real GNP terms.
  • Unemployment is expected to rise sharply in 2003 indicative of the economy growing below its potential. The unemployment rate is expected to rise beyond 5.5% during 2003, averaging 5.2% for the year.
  • Inflation in consumer prices is expected to average 5.1% in 2003. The non-traded sectors of the economy continue to be the main drivers of higher prices with a range of administered prices and indirect tax increases also making significant contributions. Higher interest rates, expected towards the end of next year, would also be a contributor to inflation exceeding 5% for the year.
  • Budget 2003 is considered to be mildly contractionary, with forecast public expenditure growth being curtailed to more sustainable rates than in recent years. The general government balance, the most appropriate indicator for judging the state of the public finances, is forecast to be in deficit of €1 billion in 2003 or 0.7 of GDP.
  • This constitutes a modest deterioration from 2002 and is consistent with a tightening of fiscal policy leaving Ireland well within the rules of the Stability and Growth Pact (SGP). Recent proposals from the European Commission to provide a more flexible interpretation of EU fiscal policy may provide a helpful background for the pursuit of sensible fiscal rules for the Irish economy.
  • Fiscal rules are never a panacea for deteriorating public finances. Greater efforts to utilise multi-annual expenditure plans, particularly for capital spending, are needed to ensure that budgetary policy remains consistent with policy priorities along with ensuring that publicly financed projects offer acceptable rates of return.