All the signs point to another year of strong economic growth
Another year of strong economic growth is in prospect in 2006.
Philip: We see two key themes. Firstly, ECB rates will rise to 2.5%, but despite the higher interest burden for Irish households, factors such as the SSIA monies and labour earnings growth mean this should not prove overly cumbersome.
Secondly, consumer spending will be the main driver of the economy, helped by high rates of employment growth. It is this growth in domestic demand (GDP less volatile trade flows) that will fuel another strong year for the Irish economy, with growth of 5.6% expected in 2006.
Shane: Despite many gloomy permutations, the balance of probability is that the Irish economy will remain on a steady and sturdy growth path over the next number of years.
Rossa: We forecast that GNP will expand by 5%, driven by buoyant consumer spending. Next year will be characterised by another healthy gain in employment, thousands more new houses and a reduction in saving by households as Special Savings Investment Account (SSIA) funds are released from next May.
Philip: This year is likely to be the 14th consecutive year in which Ireland has outperformed the EU-15 average in terms of growth, with GDP expected to increase by some 5%.
Shane: Economic growth will continue to be strong in 2006, with GNP projected to increase about 5%. This puts Ireland amongst the fastest growing economies in the eurozone. Unlike much of the growth during the Celtic Tiger era, our current economic strength is home grown.
Rossa: In normal circumstances, we reckon the volume of goods and services purchased by consumers would increase about 5% year-on-year in 2006, the same as in 2005. But the SSIAs provide a sweetener.
Based on pretty conservative assumptions that 20% of the lump sum due in 2006 will be spent (i.e. not resaved) and half of the cash that savers are tucking into SSIAs each month will also not be diverted into other savings or used to pay down debt, consumer spending growth will hit 6.5% next year.
Philip: The strength of the economy points to this momentum being maintained next year, while the release of over €5 billion in SSIA funds in 2006 (the c.€10bn balance will mature in 2007) will further underpin our expectations for consumption growth.
Shane: Expenditure by households is a key driver of growth, and the release of SSIA funds will fuel further strong spending next year, while investment by companies in plant and equipment will be brisk.
Philip: The big story this year was the performance of the consumer. Retail sales were up 7% year-on-year in September, as employment and earnings growth proved supportive for consumer spending.
The one disappointment has been the deterioration in the trade balance. In the first nine months of the year, exports rose by just 3% year-on-year, outpaced by import growth of 8% year-on-year.
There are a number of reasons for this. On the import side, consumer demand for big-ticket items such as cars has pushed up the value of the goods brought into Ireland, while energy price hikes added over €500 million to the cost of fuel imports in the opening eight months of the year.
On the export side, IT price deflation and manufacturing softness have contributed to the negative out-turn.
Shane: Consumer spending would also take a hit, as homeowners would be adversely affected. A reduction in the US economy’s unsustainably large trade deficit also poses challenges for Ireland. This is because adjustment is likely to involve a big fall in the dollar’s exchange rate. That would make it difficult for Irish exports to compete and damage growth prospects.
Rossa: The latest figures on employment provide the first hint construction growth is levelling off. In 2006, most of the new jobs are likely to be created in private services. Industry continues to shed workers and agriculture is stagnating.
Three years ago, we were told there was a cap on numbers in the public sector but that dictum has not been adhered to. Expect employment to rise further in that area in the run up to the next general election.
The landscape will be littered with many more new houses. We have more visibility on future house building as a result of two detailed series on housing starts.
At least 77,000 houses may be completed in 2006. But do not rule out another new record: much depends on whether or not rising interest rates impact negatively on demand.
Shane: House building stabilised in 2005, and will remain at a similarly high level next year. Construction is now a major sector of the Irish economy, directly accounting for over one eighth of total employment.
Large increases in the workforce numbering about 50,000 persons next year will be concentrated in the services sector, and will be facilitated largely by immigration.
A series of interest rate rises is likely to occur in 2006, but is unlikely to be large or rapid enough to impact on the Irish economy in any disruptive way.
A collapse in house prices remains the most serious threat to the Irish economy. Such a scenario would result in a swift fall in the amount of house building in the economy.
Given the importance of this sector, large scale job losses and significant falls in economic output would follow.
CONNECT WITH US TODAY
Be the first to know the latest news and updates
