john hurley : recent economic developments in ireland and the outlook for the economy opening statement by mr john hurley, governor of the central bank and financial services authority of ireland, at the presentation of the annual report 2006, dublin, 11 july 2007. * * * you are all very welcome to this press briefing to mark the publication of the annual report of the central bank and financial services authority of ireland. i will briefly introduce my colleagues who join me today. liam barron, our director general, deputy director general brian halpin, director general designate, tony grimes, and maurice mcguire, head of economic analysis and research. as you know, liam barron is retiring as director general next month. at the outset today i would like to thank liam for his outstanding contribution to this organisation over a long and distinguished career, in particular as director general and as a member of the board. i would also like to take this opportunity to wish tony grimes all the very best in his new role. tony is well placed to bring this organisation forward and to meet the various challenges in the years ahead. the annual report describes in detail our activities in 2006, which proved to be another busy year for the bank, both in terms of our domestic and our euro area responsibilities. today we are also publishing our strategic plan for the coming three years. i should also mention that the annual financial stability report will be published in the autumn and that the financial regulator will publish its own annual report later this month. economic developments i will begin by reviewing economic developments in ireland over the past year or so, before moving on to discuss the outlook for the economy for this year and next. the latest cso national accounts data, which were released after the annual report was finalised, indicate that the economy performed very well last year with gnp growth of 6. 5 per cent and gdp growth of 5. 7 per cent. reflecting the strength of output growth, last year was another good year for employment. an expansion of almost 4½ per cent in the numbers employed brought total employment above the 2 million mark for the first time. the unemployment rate remained low, below 4½ per cent – essentially full employment conditions. the pace of expansion last year was, in fact, somewhat above the economy ’ s medium term potential and, partly as a result, there was an increase in inflation. the harmonised index of consumer prices, which is the most appropriate measure, rose by 2. 7 per cent compared with 2. 2 per cent the previous year.

rapid growth also required ongoing improvements in the public capital stock ( especially transportation infrastructure and education ) through an effective infrastructural investment programme, which was in part financially supported by the eu system of cohesion and structural funds. it also depended on improvements in locally - supplied business inputs, such as telecoms and energy. taken together, it is evident that a wide range of supportive domestic institutional policies had to be in place in order for ireland to take advantage of the opportunities provided by the international trading system. for foreign investors, the stability of the irish institutional environment was also vital : long - term, large - scale investments are not likely if the domestic institutional framework is vulnerable to unpredictable shifts in terms of key policy choices. this certainly includes the predictability of the corporation tax regime but also extends to ensuring that “ doing business ” is facilitated by reasonable regulatory requirements, an efficient legal system, an agile labour market and reliable public and business infrastructures. an important feature of ireland ’ s experience has been that international economic integration is not uniform : the strength of ireland ’ s international linkages varies across countries and sectors. this is quite natural : there are fixed costs and scale effects in developing individual industries and entering different export markets. it follows that, especially for a small country, international trade can lead to specialisation in a small number of sectors and a high dependence on a particular set of export destinations. while specialisation is beneficial in terms of maximising productivity, resilience and flexibility is required in adapting to shocks in specific industries and export markets. this includes maintaining the fiscal space to cope with a sudden downturn in tax revenues, making sure the financial system is well capitalised, developing a sufficiently strong social safety net to support displaced workers and ensuring that educational and training systems can adapt to shifts in demand for different occupational skills. so far, i have emphasised the impact of trade openness on exporting opportunities. of course, it is just as important to recognise the role of imports in driving economic performance and improving living standards. at a basic level, modern production typically involves extensive use of intermediate and capital goods : access to the global supply of such goods is vital for the functioning of many industries. access to imports also is necessary if the gains to specialisation are to be obtained – a country can focus on production in a select number of industries while maintaining a full range of consumption and investment opportunities through importing all that is required. of course, this is just a restatement of