The Central Bank has raised its 2006 economic growth forecast slightly. but has expressed concern about productivity and house price inflation. It says the economy's already high dependence on property is 'a significant risk'.
The bank's latest quarterly bulletin predicts GNP and GDP growth of around 5% this year. Referring to last year's performance, the bank said employment growth of around 87,000 accounted for almost all of the growth, with productivity rising only marginally. This was because the jobs growth was concentrated in the labour-intensive building and services sectors.
The bank also said labour costs were increasing at rates well above the euro zone average, and called for future pay developments to protect competitiveness.
On housing, the report said the current level of activity was 'beyond what is required' and a contraction would be needed 'at some point'. It described the 11% annual increase in house prices in February as worrying. It said that though a soft landing was the most likely scenario, the acceleration in growth increased the risk of sharp falls in the future.
The Central Bank attributed some of the recent increases to an easing of credit conditions by mortgage lenders and the arrival of new products such as 100% mortgages. It said it had launched a new round of 'stress-testing' of financial institutions to assess how prepared they were for various types of economic shocks. The Financial Regulator has recently told institutions to set aside additional capital to cover certain mortgages.
The bank also expressed concern about a recent jump in the annual inflation rate, though it said this would probably level off to 3% this year.
