john hurley : current state of the irish economy opening statement by mr john hurley, governor of the central bank and financial services authority of ireland, to the joint committee on finance and the public service, dublin, 15 july 2008. * * * good afternoon chairman and members of the joint committee and thank you for the invitation to speak with you today on the current state of the economy and the banking / financial services sectors. i am accompanied by tony grimes, the director general of the central bank and tom o ’ connell, assistant director general, economics. earlier this year, i outlined to the committee our unitary organisational structure and i emphasised, in particular, how the central bank and financial regulator work closely together in response to the market turbulence. i don ’ t intend today to describe those arrangements again except to say that the structure continues to work very well and there continues to be the closest cooperation. it is worth reminding ourselves that we have a very different economy now as compared to 20 to 25 years ago. since then, ireland has transformed itself from being a country with a relatively low standard of living to one where average income per head is now well above the eu average. not only are living standards much higher, employment has grown rapidly and we have seen strong development in manufacturing, business and financial services sectors, helped by the fact that we have been hugely successful in attracting foreign investment. clearly, the economic situation has changed significantly, but in terms of where we are starting from, the position is very different from the 1980s. as you know, we published our annual report last week and, in my statement today, i will outline the rationale behind our latest forecasts for economic growth. in our earlier forecasts, it was always emphasised that there were many downside risks and vulnerabilities that could push growth lower. these risks related to the potential for interaction between global financial market turbulence, rising global energy and food prices and the slowing of activity within the economy, which was already underway. in recent months, almost all of these downside risks have materialised and this has led to a greater - than - expected slowdown in growth and higher - than - anticipated inflation. notwithstanding the more challenging short - term outlook, we continue to believe that growth in the economy should gradually recover and inflation moderate. however, this recovery is not guaranteed and the evolution of the economy will be very much influenced by how we respond to the current challenges we face. as a country we have benefited considerably from the

prudent, stability - focussed policy approach we have followed in recent decades. this has helped to deliver domestic economic stability, has contributed significantly to attracting foreign investment and has greatly facilitated growth. to ensure a sustainable recovery, it is very important that we maintain this approach and focus on key policy areas under our control. these include the public finances, the efficiency and effectiveness of public spending, particularly in relation to increasing the productive capacity of the economy, and overall competitiveness. the updated assessment while the emergence of a slowdown in the economy was not unanticipated, the loss of momentum has been greater than expected this year. this has arisen from a sharper - thanexpected adjustment in the housing sector alongside a deterioration in the international environment. our current forecasts are that both gnp and gdp growth will remain positive this year, albeit significantly less than 1 per cent. it will be the end of july before we finalise our forecasts, but a ballpark estimate, at this point in time, would be around 0. 5 per cent growth this year and about 2 per cent in 2009. in common with other developed economies, ireland is facing significant inflationary pressures arising from very elevated levels of energy and other commodity prices. we are all conscious of the experiences of the 1970s, when the response to the oil price increases of the time resulted in persistently high inflation. this undermined growth and employment in the economy and was especially damaging to those on fixed incomes. while the current situation is not identical, there are some similarities. it is important to accept that economic conditions here have weakened and we cannot compensate ourselves on an economy - wide basis for commodity price increases over which we have no control. as we know from past experience, if we attempt to do so, recovery inevitably becomes delayed. ireland ’ s competitiveness position has weakened in recent years because wage and broader cost inflation has been higher than in our main trading partners. it is vital for our growth prospects to ensure that our competitiveness position improves rather than deteriorates further. based on the potential for future growth in productivity and the labour force, the medium - term outlook for the economy remains favourable and growth will return to stronger levels, if the appropriate corrective action is taken. growth should pick up next year on the basis of a bottoming out in domestic housing output and some improvement in the external environment. residential housing market the housing market weakened significantly during 2007 with sharp declines in both output and prices.