‘Consumer demand will be the engine for economic boom’

AN economic boom driven by consumer demand with the multi-national and construction sectors playing a lesser role was forecast yesterday.

The bullish forecast of 6% growth for the economy in the immediate future was made by leading economist, Dr Dan McLaughlin of Bank of Ireland.

This boom will be constrained only by lack of workers, attributable directly to full employment in the economy, he said.

As a result the State will benefit from an extra €1.6bn in tax this year.

Add to that an under spending on the capital side of €400m and Dr McLaughlin says the Government will have €2bn more to play around with this year than forecast at Budget time.

Government borrowing will be closer to €1.3bn for the year, a remarkable €1.6bn less than the €2.9bn deficit predicted in the Budget, forecasts Mr McLaughlin.

If this is the case, it will be the fourth year in a row where finance estimates of high government deficits proved to be over-cautious to the tune of billions.

The Government could use the additional cash windfall to pay off the debt arising from the nursing home ruling, he said.

Higher VAT and stamp duty receipts will be the main factors in the boost to the State’s coffers as consumers spend more and housing demand continues stronger than many had expected it to be.

SSIA money will also help fuel the solid growth from 2006, adding about €1.5bn to consumer spending next year and a whopping €4.5bn in 2007.

The economy is growing broadly in line with its potential, although growth over the next few years is likely to be constrained to 6% as a result of full employment, according to Dr McLaughlin writing in the current issue of the Bank of Ireland’s Global Markets Economic Outlook.

In the current climate the bank says 6% growth in both GNP and GDP are on the cards for 2005 with unemployment falling from 4.5% to 4.3% for the year.

Despite the strong consumer boom, inflation is likely to fall from 2.2% in 2004 to 2.1% this year, he said.

The review says the consumer will emerge as the key driver of domestic demand which will expand by 5%.

Spending on construction and manufacturing exports, particularly from the multinational sector, are set to play a less important role, said Dr McLaughlin.

“The conditions for acceleration in consumer outlays are certainly in place with 3% employment growth, 6% earnings growth, a rebound in consumer confidence, low inflation, low interest rates and an expansionary Budget”, he said.

The available indicators for 2005 suggest that these positive factors are indeed translating into increased spending, he said.

Consequently, personal consumption should rise by 5.5% in real terms in 2005, rising to 7.0% in 2006 as “the SSIAs begin to impact on consumer behaviour in a more meaningful way”, he said

The Exchequer returns for the first three months of the year present a healthy economic picture, with receipts of taxes easily exceeding the Dept of Finance’s estimates.

Annual results from the Irish League of Credit Unions, published yesterday, provided another indicator of the continuing boom.

Savings by the 2.3 million credit union members rose by 15% to €11bn while loans rose by 9.5% to €5.6bn. Loans are predicted to rise by a further 12% this year to over €6bn.