Household debts put economy at risk

IRELAND’S GDP growth for this year and next will be fuelled almost totally by domestic demand, but increasing household debt poses a risk to the economy, the European Commission has warned in its spring economic forecast.

It raised its growth forecast for the EU for this year to 2.3% from its pervious forecast of 2.1%. Growth last year was just 1.6%. It expects a slight deceleration in early 2007 due to Germany’s increased VAT rate affecting consumer demand.

Announcing the forecast yesterday Economic and Monetary Affairs Commissioner Joaquin Almunia said he expected a modest increase in employment while inflation should remain around 2% despite oil price increases.

Ireland’s household debt increased by close to 30% between 2003 and 2005, the largest increase in the Union after Greece.

The report warns that the significant increases in household debt together with rising house prices are “noteworthy risks to the economy over the medium term”. Inflation is expected to be higher than the EU average in line with expected increases in the mortgage repayments.

It warns too that in the Netherlands consumer spending dropped without any official intervention as people became concerned about their level of debt and this led to weakening of growth.

Ireland’s wage growth is expected to be on a par with Greece — the highest in the eurozone.