In its latest Quarterly Outlook, AIB Global Treasury has delivered a highly upbeat assessment of the Irish economy with forecasts of 6% GDP growth this year and 6.5% for 2006.
This growth will be broad based with a strong contribution from both domestic demand and net exports, the bank says.
The report says that economic growth in excess of 5% is above Ireland's longer term potential but that strong employment growth is behind the short-term out performance. The economy remains close to full employment, with the unemployment rate projected to fall to 4% by 2006.
According to the AIB review, the contribution of residential construction activity to the overall growth in real GDP will decline over the next two years but consumer spending is strengthening and non-residential construction activity is also picking up momentum.
The review says the external environment for Irish economic growth has become more uncertain with high oil prices and currency volatility posing difficulties. However, Irish industry has become more flexible and the overall growth in world trade remains supportive of Irish export growth.
Commenting on the forecasts, AIB Global Treasury chief economist John Beggs said that GDP could reach 6.5% for 2006 and again in 2007 with the main drivers being : the strength of the labour market, rising real personal disposable income, stable public finances, overall market flexibility, healthy consumer and business confidence and a 'can do' approach plus the need to serve a growing population.
He said that while the 1990s represented a period of Irish economic revival the next five years will represent a consolidation phase where we will come to terms with the success of Ireland's economic transformation, with a shift towards services.
He said that doubts about the sustainability of economic growth include the risk of a housing crash, global competition and price competitiveness, growing personal and private sector debt, our vulnerability to higher interest rates and the growing share of construction in Irish GDP and in total employment.
He said the above issues warrant close attention but that they must be assessed in the context of wider structural developments in Ireland.
The economist said that investors and home occupiers have experienced a massive rise in the value of residential property and that the risk/reward balance in the Irish housing market as represented by the ratio of the stock of mortgage debt to the stock of housing market equity, is favourable for the sector as a whole.
On personal debt, Mr Beggs said that with the positive outlook for employment and real income growth it is not unreasonable that consumers are willing to borrow and lenders willing to lend.
He said construction is only part of a portfolio of employment creation and that the economy has a very diversified sectoral distribution of job growth, which reduces the impact of a downturn in any one particular sector on the economy such as that experienced by the manufacturing industry in recent years.
In a separate review today of the housing market, AIB Global Treasury says that house price growth will moderate to around 5% or less this year and 3% in 2006.
