BoI: Tiger economy returns

Bank of Ireland Global Markets’ Economic Research Units’ latest economic ‘Outlook’, published today, indicates that the Tiger economy is back, with economic growth expected to average 6% for 2004 and 2005 and consumer spending on the increase.

Bank of Ireland’s chief economist Dr Dan Dan McLaughlin said: “The return of the Tiger economy is being underpinned by the classic drivers of economic growth - exports and investments.

“2004 to date has seen a strong positive momentum in both merchandise and service exports while investment in capital equipment, construction and infrastructure continues to be very strong.

“We expect GDP growth of 6% this year and expect a similar figure for 2005, with inflation likely to remain around 2.7%.”

Dr McLaughlin’s research remains positive about the continued strength of the housing market.

It says: “The combination of a booming domestic economy, strong migrant inflows and low interest rates mean a sharp correction in the housing market is unlikely.”

One element of uncertainty in the short term is around oil prices. However, according to ERU economist Michael Crowley, writing in this edition of the ‘Outlook’ that the impact of oil prices is unlikely to be dramatic.

“Looking at the futures market, oil prices (in US$ terms) are expected to fall by around 10% over the next twelve months, which could depress the rate of inflation by up to 1%,” he says.

“ Furthermore, the new Minister for Finance is unlikely to increase the excise duty on petrol/diesel, given the sharp increases in these prices this year.”

In fact the ‘Outlook’ predicts that the minister will refrain from raising any excise duties, which will reduce inflation by 0.4% in December and hence influence wage inflation in 2005.

The ‘Outook’ identifies consumer spending as the only major area of the economy underperforming so far this year.

Despite high employment, a low-interest-rate economy and wage growth which exceeds inflation, personal consumption remains lacklustre.

The underperformance in consumer spending to date is due to a combination of caution around economic prospects based on past experience, and the impact of SSIAs, which have taken spending out of the economy.

However, the indications are positive in terms of the prospects for an improvement in consumer sentiment.

According to McLaughlin: “Retail spending did pick up over the summer and recent tax data suggest increasing levels of VAT and excise returns.

“Consumer confidence has also risen of late and is now up at levels last seen in the year 2000.

“This and substantial tax relief in the upcoming budget will underpin strong consumption growth in 2005, offsetting an anticipated reduced impetus from investment.”

Bank or Ireland began today’s trading on the ISEQ at €11.01.