Economy will grow for next two years, predicts bank

The economy will enjoy solid growth this year and next, the Central Bank forecast today.

In its Financial Stability report 2006, the bank said growth will match potential with GNP – the value of goods and services produced by Irish business - sitting at around 5.5%.

And it also supports the much touted soft landing in the housing market.

Governor John Hurley, however, warned our reliance on the construction sector and the dangers of losing our competitive edge are two major risks to the economy.

He also noted threats from the international arena which have increased since last year.

These include volatile energy prices, global imbalances, potential crashes in financial markets and exchange rates, the risk of inflationary pressures re-emerging and fallout from a sharp weakening in the US housing market.

But Gov Hurley said strong job creation, improved participation and migrants’ demands for work would benefit the economy.

“As has been the trend of late and given the expected composition of growth, economic growth is likely to be accompanied by strong employment growth, driven in large part by continued significant net inward migration and, to a lesser extent, further increases in the participation rate,” he said.

“As a result, unemployment is projected to remain at around its current level of 4 to 4.5 per cent.”

Gov Hurley said risks and vulnerabilities in the economy had increased since the last stability report. Debt levels were the biggest worry then.

He said this risk remains but is being compounded by higher repayment burdens and continuing uncertainty over house prices.

“However, the overall conclusion is that the Irish financial system continues to be in a good state of health to cope with such emerging issues,” the Governor said.

He said there were tentative signs of an easing of house prices and said a soft landing for the market looked most likely.