Ireland's economic expansion has continued to pick up speed this year and is expected to do the same in 2005 with only moderate inflation, the International Monetary Fund said today.
'The economic recovery will gain momentum with gross national product growth of 4.5% in 2004 accelerating slightly to 5% in 2005,' the IMF said in its annual Article IV review of the Irish economy, which was concluded on October 29. 'Core inflation is forecast to stay close to 2%,' the Washington-based IMF added.
It said the main risk to its outlook stemmed from the potential for further strengthening of the euro and the possibility of an abrupt bust in Ireland's housing boom. The IMF suggested that in the medium-term, the Government should consider removing mortgage interest relief, and introducing a 'market value based wealth tax' on property, which would hit second homes at higher rates.
The IMF attributed the 'continued impressive performance' of the Irish economy to sound policies that sustained growth in the face of substantial global shocks over the last few years.
'Flexibility in the labour market limited increases in unemployment, and inflation slowed rapidly, converging to euro area rates, after running well above trading partner country rates for several years,' the IMF said.
The IMF recommended that safeguarding competitiveness should be a key priority of Ireland's economic policy. It also called for an extended period of wage restraint and increased wage flexibility. It also urged a 'modest tightening' in the Budget, and called on the Minister to resist pressures for increased spending.
The IMF said that the country's medium term growth prospects are expected to be less buoyant than during the late 1990s. It said the key challenge for Ireland will be to manage the transition to slower growth and this will require adjustments in expectations in labour and housing markets and in fiscal policy.
Commenting on the IMF report, Finance Minister Brian Cowen said the Fund had provided a good assessment of the country's economic policies and prospects.
'I note the Board's concerns about any possible deterioration in the level of competitiveness and agree that we face a number of challenges which must be addressed if we are to safeguard our economic success and sustain our levels of growth and employment in the medium term,' he said.