Growth likely to be 6% for year and inflation 3%, says economist

Economic growth is likely to be 6 per cent this year, while inflation could be running at more than 3 per cent again at the end of the last quarter, a leading economist said yesterday.

Dr Dan McLaughlin, group chief economist, Bank of Ireland, argued in the bank's quarterly outlook that the global economy had turned into a boom in a number of key countries.

"China is the fifth biggest economy in the world, and it is now growing at 10 per cent year-on-year," he said yesterday.

"Japan has registered 6 per cent, while the US is expanding at 5 per cent and the UK is also growing above trend. It seems fairly clear to me that we have got a global boom. That should have significant benefits for the Irish economy," he said.

Dr McLaughlin added that the overall situation was partly underpinned by historically low interest rates.

He pointed out that the cost of borrowing was the lowest for 50 years in Europe and the US, while it was at a 40-year low in the UK.

He said that most commentators, however, believed that the US Federal Reserve could increase its base rates by 0.25 per cent next month, which would mark the beginning of the end of a period of exceptionally cheap borrowing.

Here, the bank has upgraded its forecast for gross domestic product (GDP), growth to 6 per cent from 4.5 per cent.

"All components of demand bar government spending are set to accelerate," he said, "including consumption, helped by a fall in the savings ratio, investment, boosted by strong foreign direct investment (FDI) inflows, and exports, underpinned by the global upturn."

Dr McLaughlin said that he expected gross national product (GNP), which excludes repatriated multinational profits generated in the Republic, to expand by 5.5 per cent.

He also warned that inflation had bottomed out, and while it was set to average at 2.3 per cent for 2004 as a whole, it was likely to accelerate beyond 3 per cent year-on-year by December.

He explained that the higher inflation would be driven by increased demand, a fall in the euro against sterling and oil prices.

Dr McLaughlin conceded that oil prices were the one potential black spot on the horizons of both the domestic and global economies.

However, he said that the recent $38-a-barrel highs tested by Brent Crude were driven by speculative buying on the part of hedge funds, and would fall back to a range of around $30-$32 a barrel.

Dr McLaughlin's forecasts were based on this assessment, but he pointed out that a sustained $10 increase in oil prices could knock 0.5 per cent off economic growth.

Dr McLaughlin also argued yesterday that the Irish economy had retained most of the employment gains made during the 1990s.

He said that unemployment had peaked at 4.9 per cent last July, and now stood at 4.4 per cent, implying annual net new job creation of 50,000.

He was critical of the fact that there was no information on wage inflation in the year to date. But he said that trends varied from sector to sector, with finance and construction coming from double figure highs in 2000 to just over 1 per cent last year before accelerating again.

Industrial pay increases remained within the 6-9 per cent range during the same period, while the public sector salary inflation slowed to 3.5 per cent in the last quarter of 2003 from 4.5 per cent a year ago.

On that basis, he argued that any pay increase agreed in the current national agreement talks could be too high for some businesses and too low for others.

"The absence of an agreement would not be as negative as some imply," he said.

Dr McLaughlin added that as the outcome of the talks appeared to hinge on the future ownership of Aer Rianta, this indicated that the talks really involved "political insiders".

He argued that issues like Aer Rianta should really be for the electorate to decide.

Based on the fact that the tax take across nearly all categories was either on target or ahead of Budget predictions, he predicted that the Exchequer current account surplus could be €5.2 billion by the year's end, which would be offset by a capital spending requirement of €5.8 billion, leaving the State in one of the most comfortable fiscal positions in Europe.