Central Bank warns about inflated 2014 GDP figure

The Central Bank has increased its forecast for Irish economic growth for last year and this year in its latest review of the economy.

The GDP estimate for 2014 has been raised to 5.1%, which is a 0.6% increase on the Central Bank’s previous forecast. GDP is said to grow by 3.7% this year and 3.8% next year.

However, Central Bank economist John Flynn said the 2014 GDP figure was artificially inflated by ‘contract manufacturing’ in the multinational sector.

Over the course of last year, large foreign-owned firms based in Ireland outsourced manufacturing activity to affiliate companies in other jurisdictions but booked the profits in Ireland.

Contract manufacturing does not lead to increased employment or create any value in the economy other than boost the GDP figure, and Mr Flynn said it was not possible to calculate the effect of contract manufacturing on 2014 data, or predict whether it would be repeated again this year.

Central Bank chief economist Gabriel Fagan said government policy should remain focused on budget consolidation and reducing the still high debt levels. The Government is expected to achieve the 3% deficit target agreed with the troika by the end of 2015.

Moreover, under the terms of the fiscal stability treaty, the Government has to comply with a medium term objective of running a fiscal deficit of no greater than 0.5% of GDP, said Mr Fagan.

The Government has one more budget before it faces the electorate in April 2016. The expectation is that it will attempt to reduce taxes and increase spending where possible. Mr Fagan said it was the role of the Central Bank to offer economic advice, but it was the role of Government to set fiscal policy.

“We do economic analysis. We do not do political analysis on what it takes for governments to get re-elected,” said Mr Fagan.

The recovery is becoming more sustained and broadbased, according to the Central Bank. Investment is forecast to grow by 10% this year; domestic demand by 3.1% and exports by 5.2%. The unemployment rate is projected to fall to 10.4% by the end of 2015 and 9.3% by the end of 2016.

Article Source: http://tinyurl.com/kbwqb42