THE Budget’s €2.5bn worth of tax hikes and spending cuts will have a dampening effect on economic activity, Bank of Ireland has warned.
But the bailed-out lender said it still expects domestic demand to increase by more than 1pc next year, with a strengthening of investment together with the increase in consumer spending more than off-setting another fall in Government spending.
In its latest economic outlook, the bank forecast the economy would grow 0.4pc this year and 2pc in 2014. This is broadly in line with the projections from the Department of Finance, although it sees growth being more modest this year at 0.2pc.
“Another positive development has been the stronger than expected increase in employment over the first half of this year,” the bank said.
“Rising employment together with some modest pick up in earnings growth will boost personal disposable incomes and thereby support consumer spending, which we expect to increase by just over 1pc in real terms next year.”
The bank said the recovery in the second quarter of this year was driven by a rebound in exports, which it said was likely to rise further before the end of the year.
“Nevertheless, given the weak first half outturn – an annual fall of 1.6pc – exports for the year as a whole are still likely to be broadly flat on 2012,” the bank said.
Inflation is likely to increase in the final three months of the year, but underlying price pressures are expected tor remain subdued even as economic activity picks up next year, the bank said.
And it claimed that the recent rise in house prices may prompt would-be buyers to make a move, supporting prices over the coming months.
“Because of the collapse in prices in recent years, affordability is at its best level since 1997. On our model, repayments on a 25-year mortgage now amount to around 25pc of gross income compared to a long run average of around 30pc, while on some measures house prices are now undervalued,” the outlook said.
“More importantly perhaps, rising employment in the economy should support a continuing recovery in the market.”