Ireland’s central bank said that the government should meet a 2012 budget-deficit target as it raised its growth forecast and said a slump in domestic demand may bottom out next year.
“Fiscal developments have remained broadly on track,” the central bank said in its Quarterly Bulletin published in Dublin today. “A gradual moderation in the contraction in domestic demand is forecast for this year with activity in the domestic economy gradually bottoming out during the course of 2013.”
Ireland returned to the bond market last week with the sale of 4.2 billion euros ($5.2 billion) of new securities. While the external environment remains “very challenging,” the central bank said there is some evidence that Ireland is decoupling from other peripheral nations in the euro area. Ireland aims to narrow its deficit to 8.6 percent of output this year in line with its bailout program.
Gross domestic product will rise 0.7 percent this year, the central bank said, compared with its April forecast for 0.5 percent. The economy will grow 1.9 percent next year, compared with a 2.1 percent forecast in April. Ireland’s Finance Ministry also forecasts 0.7 percent expansion in 2012.
Ireland’s economy returned to growth for the first time in four years in 2011, expanding by 1.4 percent. Still, it shrank 1.1 percent in the first quarter.
Ireland’s bid to avoid a second bailout from 2013 improved after euro-area policy makers opened the door in June to recapitalizing banks directly with the European Stability Mechanism, instead of through the government. Prime Minister Enda Kenny said he will seek the “maximum benefit” in talks with European partners to reduce the burden of the country’s 64 billion-euro bailout of its banks.
While the negotiations “may in time reduce the effort needed to reduce the national debt to a sustainable level over the medium term, it does not remove the urgency of bringing revenues and expenditure into broad balance,” the central bank said. “In particular, it is vital to ensure that the deficit reduction targeted for this year, and subsequent years, is solidly achieved.”