BoI: Irish investments abroad contributing to rise in income

The average Irish income (GNP) is rising faster than output because of Irish assets abroad according to Bank of Ireland’s quarterly economic outlook published today.

This reflects a reversal in the historical norm and resulted in a GNP growth of 8% during the first half of the year which is expected to lead to average growth of 6.6% in 2006.

Dr Dan McLaughlin, Chief Economist Bank of Ireland Group said: “Coverage of Foreign Direct Investment tends to centre on multinational flows into Ireland, and often ignores Irish investment abroad, which has risen steadily in terms of portfolio and direct flows.

"The impact is readily apparent in the data on income flows in the first half of 2006, with Irish income earned abroad rising by 39%, against a 22% rise in income paid to foreign owners of assets in Ireland”.

According to the outlook, the pace of employment growth has been consistently buoyant for over a year, with the latest figures showing a rise of 4.6%.

Yet, the pattern of job creation has changed over the past twelve months. For example, construction accounted for almost 40% of jobs created in the year to the second quarter of 2005, but accounted for less then 25% of job creation recorded to Q2 2006.

Manufacturing has continued to shed jobs (5,000 over the past twelve months), however the services sector has stepped into the breach and is now the driver of Irish growth.

Dr McLaughlin said: “The pace of employment growth continues to surprise and our 80,000 forecast for 2006, which was well above the consensus, now looks conservative in light of the trend year-to-date.

"Data for the second quarter showed an annual employment gain of 88,000, taking the total at work to over €2 million for the first time. This follows a 90,000 annual gain in Q1, so maintaining the extraordinarily strong pace of job creation evident since early 2005. Employment growth of 75,000 is expected in 2007."

The economic outlook predicts that GDP growth will remain in a 5% - 6% range for the next 18 months, averaging 6% in 2006 and 5.8% in 2007.

Growth is being fuelled by consumer spending which is set to rise by over 10% in cash terms this year which in turn has been underpinned by employment growth and a modest decline in the savings ratio on foot of the release of SSIA accounts.

Dr McLaughlin concluded: "There are some negatives in this otherwise very positive outlook, including higher inflation and rising interest rates. The latter is a significant factor in driving the former, via higher mortgage costs, and rates are likely to rise by a further quarter percent.

"However, oil prices have tumbled of late and this will act as a partial offset and will probably keep inflation below 5% this year with the prospect of a steady decline to under 3% by end 2007. This decline will help support the consumer next year as will further employment gains, the release of the bulk of SSIA accounts and a reduction in the tax burden."

The outlook predicts that the December budget will include a €3.5bn injection into the economy.