Domestic demand to drive growth

DOMESTIC demand will be the key driver of economic growth, AIB, the country’s largest bank, said yesterday.

For 2006 it is forecasting gross domestic product (GDP) growth of 5.3%, rising to 5.7% in 2007.

Those figures are less than the revised figures from Davy Stockbrokers last week, which said gross national product (GNP) this year will hit 7%. AIB’s chief economist is putting GNP in the current year at 5%, rising to 5.5% in 2007.

Overall AIB chief economist John Beggs points out that exports were dwarfed by imports last year, leading to a negative contribution of 1.7% to GDP growth in 2005.

Not since 1998 has that happened and net external growth is expected to remain a drag on growth again this year, with some improvement coming next year as our export performance starts to pick up, Mr Beggs said.

But overall, the picture of the economy is one of robust demand, which will be helped over the next 12 to 18 months by the onset of the SSIA windfall, worth a total €16 billion to savers.

As the money makes its way into consumers’ pockets, the savings ratio will decline from last year’s peak of 14%.

By the end 2007 that figure will have declined to 11%.

But overall Mr Beggs suggests the SSIA impact on growth will not be as dramatic as some have projected.

However he says with the maturing of SSIAs and the continuing strength of the labour market, “private consumption should be the most important source of overall GDP growth over the next two years”.

Personal spending should grow by 6.5% in 2006 and jump to about 8% next year as the impact of SSIAs becomes more pronounced, he said.

Investment spending is the other important factor in the economic story in Ireland, however, and Mr Beggs said “we are still finding it very difficult to comprehend” the level of infrastructure and back-up supports required in this economy as a result of the surge in population and the huge growth in employment in recent years.

Last year investment spending made a sizeable contribution to our GDP when it rose 13% year-on-year.

Its contribution this year will be more modest, as investment slows somewhat to 7.5% in 2006 and 4% next year as the housing market slows.

Overall Mr Beggs said “economic performance remains impressive”.

“Strong GDP of close to 5% per annum has been accompanied by a very robust growth in employment and, not surprisingly, by a very healthy balance in the public finances.

“The outlook for 2006 is for a continued impressive overall economic performance,” he said.