Irish GDP growth is forecast at 6% for 2006

Conor Keane:

IRELAND’s housing stock is worth €700 billion and is carrying a loan-to-value mortgage of just 17% or €119bn, figures released by AIB indicate.

And while the rate of growth in the Irish economy is expected to slow, it will still create an extra 140,000 jobs over the next two years, despite an expected slowdown in house construction.

The chief economist at AIB’s Economic Research Unit John Beggs, commenting on growing debt levels in the Irish economy, said the vast bulk of personal debt is secured by property.

“The risks in relation to growing personal sector indebtedness are very much linked to the prospects for the housing market, where we expect a soft landing.

“There has also been a very sharp rise in household assets. Indeed, at end 2006, the outstanding level of residential mortgage debt will be equivalent to around 17% of the value of the housing stock, which is expected to be around €700bn,” he added.

Mr Beggs said that he wanted to make it very clear that the Irish economy is continuing to perform remarkably well.

“Employment growth is likely to average 4.5% (90,000 jobs) this year, after a 4.7% rise in 2005. GDP growth is forecast at 6% this year, up slightly from 5.5% in 2005.

“Looking forward, it is likely that the growth rate of the Irish economy will slow somewhat in 2007 and 2008 as many of the factors currently boosting activity begin to wane. Growth in the global economy is expected to moderate, interest rates are rising and new housing output may soon start to decline, while the impact of maturing SSIAs and an expansionary fiscal policy is likely to become less pronounced by 2008. We look for GDP growth to ease somewhat to 5.5% in 2007 and 4.5% in 2008.”

This implies continuing large net inward migration and a further rise in participation rates to meet continued strong growth in the demand for labour. Employment growth is expected to moderate but still average a robust 3.5% per annum over the next two years.

Mr Beggs knocked on the head the notion that the economy becoming lopsided and overly dependent on the construction sector.

“The fact is that GDP growth has been very well balanced to date in this decade. Indeed, in 2006, we expect domestic demand and exports to both rise by 6%. Within domestic demand, consumer spending, Government consumption and fixed investment are forecast to rise by 6.5%, 4.5% and 5.0%, respectively. This can hardly be called lopsided growth,” he said.

Mr Beggs acknowledges the pace of growth in housing activity is slowing and housing output is likely to rise by about 6.5% this year, down from the double digit growth rates of recent years.

He believes the slowdown in housing should be offset to some extent by a pick up in non-residential construction activity, which has been very weak in recent years. It is also encouraging to see a marked pick up in Irish manufacturing activity and a rebound in service exports.

AIB Global Treasury says Irish Economy to grow by 6% in 2006, slowing somewhat to 4.5% by 2008