AIB is now expecting inflation to average at 5 per cent in 2003, but again forecasts a higher rate in the early months of the year, writes Una McCaffrey.
Inflation could rise above 6 per cent next month as the effects of the Budget kick in, economists believe.
Some commentators have also calculated that economic growth in 2003 could be cut by at least 1 per cent when the impact of the Budget is combined with previously announced increases in the price of services.
Mr Colin Hunt, research director at Goodbody Stockbrokers, said yesterday that he had reduced his GDP forecasts for next year from 4.8 per cent to 3.7 per cent after full consideration of the Budget. "The Budget has a clearly contractionary effect on the economy," he said.
Aside from the direct impact of raising the headline inflation rate by almost 1 per cent, the measures contained within Budget 2003 will have the unwanted side effect of fuelling wage demands, Mr Hunt believes. "The likely implementation of benchmarking will cause a spillover in the private sector," he said. He also expects consumer demand to falter as the failure to index tax bands and credits to inflation weighs on real income.
Mr Hunt has also reduced his GNP forecast, again shaving off 1 per cent to bring it to 3.6 per cent.
The Department of Finance has forecast that GDP will grow by 3.5 next year, while it expects GNP to increase by 2.2 per cent.
The Department is predicting that inflation will average at 4.8 per cent over the year, just above Mr Hunt's forecast of 4.5 per cent.
At the start of the year, however, Mr Hunt expects the consumer price index to jump by 6.5 per cent as the impact of VAT increases and excise hikes works its way into prices.
Dr Dan McLaughlin, chief economist with Bank of Ireland, also foresees inflation rising to 6 per cent next month, before tailing off to 4 per cent towards the end of 2003. Depending on next year's budget, the rate should decline to about 3.5 per cent in December 2003, Dr McLaughlin said.
He does not expect the still high average to have an adverse effect on growth, however, maintaining his pre-Budget GDP growth forecast of 6 per cent on the basis that global economic conditions will improve soon. "I don't think fiscal policy has a huge influence on growth," Dr McLaughlin said.
Mr Oliver Mangan, of the bank's economic research unit, said the combination of the budgetary measures with services price increases already due to apply next year would add 2 per cent to the consumer price index.
Mr Mangan said the Minister for Finance, Mr McCreevy would "do well" to hold inflation at 5 per cent. It was "unbelievable" that the Minister had effectively raised taxes but had remained committed to an unchanged Special Savings Incentive Scheme, according to Mr Mangan.
