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Quarterly Economic Commentary, Winter 2006Embargo: Thursday December 21st 2006 at 00.01a.m.Dr. Alan Barrett, Dr. Ide Kearney, Yvonne McCarthy Some of the main findings of the analysis include: · 2006 has been another year of strong economic growth. We expect that real GNP will have grown by 6.2 percent. For 2007, we expect a continuation of this strong performance with real GNP growth expected to be 5.3 percent. · Consumption will grow more strongly in 2007 relative to 2006. This is because of the SSIA effect and also because of the generous Budget. · Exports will grow less strongly in 2007 relative to 2006. This is because both the euro-area and the US will grow less strongly next year relative to this year. Also, the fall in the value of the dollar relative to the euro will slow down export growth. · One positive effect of the dollar slide is that it may contribute to limiting further interest rate rises on the part of the ECB. We expect one more 25 basis point rise in 2007 but then for rates to be left unchanged. In our General Assessment of the economy, we look at three issues. · The deficit on the current account of the balance of payments has grown since 2003 and is expected to rise again next year, reaching 5.6 percent on GNP. The benign view of this development is that it reflects a high level of investment in the economy relative to savings. Under this view, balance will be restored when investment needs are met. A more troubling view sees the deficit as a sign that the economy is growing too fast whereby demand is outpacing supply. In this situation, borrowing from abroad is accumulating and so the economy is vulnerable to changing lending conditions on the part of foreign lenders. We are not able to say which is the case for Ireland but see it as being important that the situation be analysed more fully. · We believe that the recent Budget was overly expansionary, given that the surplus planned for 2007 is lower than the outturn for 2006. Our own tax forecasts suggest that the Budget will not be as expansionary as official figures suggest. Even still, the Budget will fuel demand at a time when the economy is growing above potential. · The fall in the dollar once again draws attention to the possible impact of events in the US on the Irish economy and the need to maintain competitiveness. A Press Briefing will be held at the ESRI (note new location at Sir John Rogerson’s Quay) on Wednesday December 20th 2006 at 11:00am. For further information contact: Dr. Alan Barrett (ESRI) @ 8632112; |
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