Friday 26 December 2014

Growth to hit 3pc as consumers start to spend again

Published 07/08/2014 | 02:30

Consumer spending is set to increase. Photo: Tony Gavin
Consumer spending is set to increase. Photo: Tony Gavin
David Duffy

THE Economic and Social Research Institute (ESRI) says the economy will grow much faster this year than the Government estimates.

Gross Domestic Product (GDP) will surge 3pc fuelled by a recovery in spending as well as improving investment. That compares with the more conservative 2.1pc forecast from the Department of Finance.

The think-tank also forecast that unemployment would fall below 10pc by the end of next year.

But at the launch of its latest economic commentary, the ESRI warned that growth prospects for the euro zone were "somewhat worrying" as Italy, the euro zone's third largest economy, slipped back into recession.

"We're seeing the domestic economy starting to make a contribution to growth," said the ESRI's David Duffy.

"Not only through recovery in consumption, but also in investment, in building and construction.

"We're starting to see more balance emerging in the growth."

It said that while there are positive numbers coming from the Exchequer returns, no decision should be made on the Budget adjustment until closer to October.

But it said that tax hikes and spending cuts of €1bn or less could be all that is needed.

This comes as Goodbody stockbrokers forecast that the deficit this year could come in below 4pc - well ahead of the prediction from the Department of Finance of 4.8pc.

But the ESRI warned there remains a number of challenges which could "impede a fuller and more consolidated recovery".

It said credit constraints in the economy appear to have negative implications for the investment and employment decisions of small and medium sized businesses. It also said inflation would remain low.

"More generally, investment in the Irish economy is a key concern; the investment rate is down to just over 14pc - a 50-year low.

"That low rate indicates that, at present, new additions to the national capital stock are merely compensating for losses due to the natural rate of depreciation. This observation, along with the present high rate of unemployment and the low level of credit being extended by the financial sector, implies that the Irish economy is still somewhat below its potential level."

Key forecasts from the summer commentary include a rise in GDP of 3pc this year, increasing to 3.7pc in 2015. Personal spending will rise 1.5pc and increase by 2pc next year.

Unemployment will drop to 11.5pc by the end of this year and dip to 9.8pc in 2015.

Investment will jump 8.1pc in 2014 and 8.9pc next year, while exports will increase 3.5pc and 4pc next year and imports will rise 3pc and 3.7pc.

The ESRI pointed out that the value of goods exports has increased 10.4pc in the first three months of the year - the largest increase, quarter-on-quarter, since the issue of the pharmaceutical patent cliff hit in early 2012.

But it also warned that growth prospects were somewhat worrying for the euro zone.

"It's very difficult to see where the growth is going to come from," said the ESRI's Kieran McQuinn.

The ECB's governing council holds its monthly meeting in Frankfurt today.

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