Ireland should outpace eurozone but faces threat from high oil prices

IRELAND should continue to outperform the eurozone average but sustained high oil prices will hurt economic growth, financial services firm PricewaterhouseCoopers (PwC) said yesterday.

The firm’s European Economic Outlook, published yesterday, said Irish GDP growth would be in the region of 4.5% this year and 5% in 2005, far outpacing the eurozone averages of 1.75% and 2.25%.

PwC economist Rosemary Radcliffe said world economic growth would hit 4% this year, driven largely by a strong performance in America. But she warned that there were clouds on the American horizon that were caused by high levels of debt among both corporates and households. The American budget deficit was now approximately 5% of GDP, which was significantly higher than the 3% ceiling faced by European governments under rules underpinning the euro.

But Ireland had more to fear from a worldwide economic downturn than most other countries, according to PwC. Ireland relied heavily on exports and inward investment, making it one of the most open economies in the world, and was “particularly exposed to adverse external developments,” said Ms Radcliffe.

PwC said its forecasts would be affected by continuing high oil prices or political shocks such as another large-scale terrorist attack. The firm’s predictions were based on oil prices gradually slipping back over the next 12 to 15 months from their current record highs of over $50 towards the $35 mark. But estimates for world economic growth would be revised down from 4% to 3.5% if oil prices remained at current levels.

PwC had good news for homeowners and other borrowers, with predictions that eurozone interest rates would remain at their current low of 2% well into next year. Ms Radcliffe described growth levels in the eurozone’s main economies as “anaemic” and said there was no economic case for an interest rate increase. There could even be another rate cut if growth levels failed to pick up.

“We expect the ECB to keep rates on hold for the rest of 2004, but rates could rise gradually during 2005,” said Ms Radcliffe. “But any signs that the recovery is stalling could yet require the ECB to start cutting rates again at some point.”

PwC said economic conditions in Britain would remain positive, with growth of around 3.5% in the current year, before slowing to 2.5% in 2005.