The Central Bank has again warned of the dangers of an overheated housing market and the composition of recent economic growth. In its first quarterly bulletin of 2006, the Bank says it is worried by the fact that there has been little or no slowdown in the pace of personal sector credit growth.
However, the Bank says in today's bulletin that the outlook for the Irish economy generally remains good. It is predicting GNP growth for this year of about 4.5%, while GDP growth is expected to hit 4.75%.
The Bank says that consumer price inflation remained quite low last year and was broadly in line with the EU average. A modest increase to around 2.75% is expected for 2006 and the Bank warns that it is very important that domestic inflationary or cost pressures do not re-emerge to threaten competitiveness.
Despite the general upbeat outlook, the Central Bank cautions that several risks still remain. The Bank remains worried about house price developments, rapid credit growth and a construction sector which it says it unsustainably large in the medium term.
It welcomed the moderation in annual house price increases witnessed in the first half of last year, but notes that they have recently picked up to an annual rate of over 8%. It says this is very worrying against a background of the already very high price levels and fairly subdued construction costs.
It says this combined with the continuation of housing construction at a very high level, may explain why there has been little or no slowdown in the pace of personal sector credit growth. 'This is because mortgage credit - which accounts for about 80% of personal credit - continues to increase at a rate of over 25%. A situation where debt is increasing at a rate that is more than three times that of income is unsustainable,' the bulletin writes.
The Quarterly Bulletin also highlights some concerns the Bank has on the composition of economic growth here in recent years. In the past year or two, it says that growth has been relatively labour-intensive and this has been associated with lower productivity growth.
'While employment in 2005 is estimated to have increase by about 4.5%, the growth in productivity is estimated to have been as low as 1.5%,' the Central Bank states. It says this scenario is not unique to Ireland, but adds that there is room for increased competition in the services area and more innovation and Research and Development activity in order to promote better productivity performance.
Externally, Ireland remains vulnerable to any wide exchange rate movements, especially because of the country's high level of external trade with non-euro area markets.
