Modest growth forecast for 2004

A MODEST improvement in the economy is expected in the next 12 months, a leading economist said yesterday.

IIB Bank chief economist Austin Hughes said that although it would not be dramatic, there would be a “clear improvement in activity and employment”.

He said there was growing evidence that demand in Ireland’s trading partners was growing stronger and Ireland was emerging from the global economic downturn comparatively well.

Mr Hughes does not expect any major changes in the December budget, those he is expecting a rise in indirect taxes.

“The pace of increase in public spending has eased dramatically in the past 12 months and is now within a range that is sustainable for the next couple of years. The fact that the public finances have moved onto a healthier trajectory should substantially reduce the risk of material policy error in the upcoming budget.”

Mr Hughes told a conference at the Galway Mayo Institute of Technology yesterday that there was clear evidence that the US was seeing a solid improvement in economic activity at present.

“This is largely the result of a major injection to household spending power as a result of tax cuts. These will continue to support consumer spending in the US until mid 2004. As a result, business spending has begun to move higher,” he said.

He said the current level of activity suggested that the US economy would continue to grow between 3% and 4% for most of the coming year.

He also expects the US dollar will continue to weaken against the euro through the coming year. “This profile for US growth opens up the risk of a sharp dollar fall at some point during 2004.

"A pronounced dollar drop could bring about a further cut in ECB rates in early 2004, but the more likely prospect of a modest dollar fall will delay any rise in European interest rates until very late 2004.”

The main reason that he expects the ECB to be slow to raise interest rates and the euro to rise relatively modestly against the dollar is that while the euro zone economy looks set to show an improvement, it will be of modest proportions.

“However, in light of healthier conditions worldwide and tentative signs of an improvement in Europe, I no longer expect a further ECB rate cut unless the dollar weakens a great deal.”

The reduced likelihood of an ECB rate cut owes much to yesterday’s strong German IFO survey data, which point clearly towards a marked improvement in the euro zone economy. The October reading at 94.2 was the highest since February 2001.