GDP growth of 5% forecast
While the figure is 0.5% less than earlier forecast, it is well ahead of the Government’s revised figure of 3.6%.
Goodbody’s are confident the economy will continue to perform well, arguing that the gloom and doom spoken of since the hi-tech meltdown in the US has not been realised.
Goodbody senior economist Don Walshe said the economy continued to increase the number of jobs by 2% per annum despite the grim forecasts. Even when the International Monetary Fund warned about an impending spending threat it acknowledged that “Ireland had come out very well from the global economic slowdown,” he said.
Another pointer to a sound economy is the fact that in the post-boom scenario “we have witnessed no sharp decline in house prices, nor have we seen a sharp drop in the numbers at work, which are two key indicators of an economy in serious trouble after a boom period,” he said.
Overall, the brokers see more difficult times ahead and have lowered their medium-term growth forecast to about 4.5% against 5%-5.5% from more optimistic growth predictions. But the brokers say the overall trend was still reasonably optimistic despite the underlying threats to future growth.
On the negative front, they forecast the Government would fail to meet its 14.5% spending target for the year. It expects the figure to be 16.5%, while it rules out an exchequer surplus of 170m and replaces it with a deficit of over 1 billion. They warn that if the Government is to balance its books over the next three to four years it will have to cut annual spending to 6% or else face heavy borrowings.
Two things in particular stand out. The serious levels of inflation and the threat of wage increases eroding our competitiveness.
On inflation, the reality is that service inflation in the protected sectors is running at four times the European level, while, in general, the cost of living is rising at more than twice the European average, and looks set to continue for some time, said Mr Walshe.
In that context, the dangers to the economy are very much internal. Failure to keep inflation and wage increases in check risks blowing the economy seriously off course, he warned.
For this year, Goodbody revises its consumer-spending figure, down from 4.2% to 3.5%, but they regard the easing back by the consumer as a good sign. In the context of an economy whose growth rate has gone from 9% on average over five years to 5% this year, the good news is that we do not have a weak credit situation.
Goodbody warned, however, that despite their basic underlying optimism for the economy, the cut in spending from 16% this year to 6% over the next few years has serious implications for how we conduct ourselves.
It warns that if the benchmarking deal of 9% increase in public sector pay is sustained that such a move would require a cut in current spending if the Government intends to go for 6% spending overall.
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