The Central Bank has forecast that the Irish economy will grow by 5.5% this year. But the Bank's Governor, John Hurley, has warned that a recent sharp rise in oil prices and the increase in consumers' borrowings are threats to the healthy economic growth.
In its annual report - published today - the Central Bank says the Irish economy continues to perform well with the underlying strength reflected in the labour market. Total employment grew by around 4% in the first quarter of the year - the fastest rate of growth since the end of 2000. The bank said the construction and related sectors accounted for about half of this increase.
The Irish construction industry accounts for about 12% of employment growth here, compared to about 8% for the euro area. The bank says the main reason for this is because the country is trying to address the infrastructure shortfall, while housing construction has also been exceptionally high. However, it warns that the current high level of house building will inevitably moderate.
On a positive note, the Central Bank says it has seen a slowdown in house price growth. Last year the bank had expressed its concern about house price increases, which were running at a year on year rate of increase of 12-13%. It said that unless house price increases were to slow to about the same level as nominal GDP, there was the risk of a sharp correction at some stage.
'House price increases have indeed shown a welcome deceleration with a year on year increase now of 7%, against the background of increased housing supply,' the Central Bank report says.
The bank says its main concern now is the rapid growth and high level of indebtedness in the economy. It says that total private sector credit is growing at an annual rate of about 25%.
'There is no longer any doubt that the private sector is highly indebted by international standards and this level will very soon match the levels recorded in Europe's most indebted economies. The ratio of debt to disposable income of the household sector is now in excess of 120% and is growing very strongly,' the bank says.
The bank says the point of most concern about the high and growing level of indebtedness is that it is occurring at a time of historically low interest rates so that any significant increase in rates or downturn in economic activity in the future would cause problems, particularly for recent and more highly indebted borrowers.
The Central Bank also notes that Ireland's competitiveness has experienced a small deterioration in the last year and competition issues remain of concern. The Irish economy is especially exposed to any sharp weakening of the US dollar against the euro that might emanate from the large global imbalances, it cautions.
On the euro area, the Central Bank says it expects growth to moderate his year from the 2% increase recorded in 2004. The Bank says the 0.5% rise in the first quarter of this year overstated the strength of the economy somewhat and the indications are that growth has remained subdued.
'Though the economic recovery has lost momentum, nevertheless, we expect to see a gradual improvement in economic activity, supported by historically low interest rates and other favourable domestic and external factors,' the Bank said.
'In the light of the information currently available, the present monetary policy stance of the Governing Council of the European Central Bank is that interest rates are at an appropriate level. Of course, we continue to monitor and to carefully assess all emerging data,' it adds.
The Central Bank also reported today that its profits for 2004 came to ¦122.5m, up ¦53m on the previous year. The Bank paid the Exchequer a surplus
of ¦103m and said the ongoing level of profits reflects the prevailing lower interest rate environment.
'Looking further ahead, most indicators would point to the Irish economy continuing to grow strongly at a rate of about 5% over the next few years,' comments Central Bank Governor John Hurley.
'As a very open economy, the performance of Ireland is significantly dependent on the global economy, the prospects for which are broadly favourable,' he adds.
