GDP to top 5.5%, says AIB

AIB joined the chorus of upbeat views on the Irish economy yesterday, with predictions that Irish GDP growth would top 5.5% this year and that the housing market was in line for a soft landing after years of runaway price rises.

But the bank warned of possible nasty surprises from an international environment that was “fraught with risks and uncertainties” and said sustained high oil prices would knock as much as 1% off the Irish growth figure.

Speaking at the launch of the bank’s quarterly review of the Irish economy, chief economist John Beggs said there was scope for new

Finance Minister Brian Cowen to reduce the income tax burden in December’s budget and that a widening of the income tax bands was the least taxpayers deserved.

“Budgetary policy must ensure that taxation remains at competitive levels and that distorting levies or taxes are eliminated or avoided,” said Mr Beggs, who added there should be no further rise in personal taxes.

There would continue to be good news on the jobs front, with the labour force growing by 2.5% both this year and next.

The “resilient” performance of the jobs market was one of the most impressive features of the Irish economy over the past year, said Mr Beggs.

But unemployment was unlikely to fall below 4.5%, the level effectively considered full employment, because the extra jobs would be filled by people moving to Ireland from abroad.

Investment in fixed assets was the main driver of economic growth, with strong activity in the construction sector, particularly in residential building, and renewed investment by businesses in plant and machinery.

Residential construction was predicted to slow down in the coming years, however, as builders cut back on output in response to falling demand for new houses.

But there would be no house price crash. Mr Beggs said there was already evidence of house price increases beginning to moderate, with rises confined to 10% this year and falling to between 3% and 5% in 2005.

Only a sharp rise in interest rates or an unemployment shock would change AIB’s analysis going forward.

Mr Beggs said interest rates were likely to rise by 0.75% to 2.75% before the end of 2005 but that this would still leave rates at historically low levels and would not cause significant problems for borrowers.

There was a possibility that interest rate rises would be delayed if the euro strengthened against the dollar.

AIB predicted an exchange rate of $1.25 to the euro, compared with current rates of around $1.23, but warned a sharper fall in the dollar would hurt the competitiveness of Irish exports.

Mr Beggs also said current trading patterns on world oil markets suggested there was a high element of speculative trading influencing oil prices.

Once oil prices were perceived as having hit a ceiling, it was likely that prices would see a “significant correction”, said Mr Beggs.