Charlie McCreevy may be a veteran gambler, but even the Minister for Finance would have trouble giving sensible odds on the chances that there will be no further increases in mortgage rates this year, or a further fall in the euro.
His latest full year inflation target of 5.25 per cent relies on these two assumptions, both of which are looking increasingly unrealistic. Most economists expect that the European Central Bank will increase interest rates in the near future, possibly as early as next week. The consensus is that they will have to be increased by 0.5 percentage points between now and the end of the year, pushing up mortgage costs and the Consumer Price Index in the process.
The euro is currently within one cent of its all-time low against the dollar and is expected to fall further because of concerns about the German economy. The only thing that can be said with any certainty about the euro exchange rate is that it will move. An interest rate rise next week might actually have a negative impact on the euro if the market is seriously concerned that growth in Europe's largest economy is faltering. The third assumption made by the minister in framing his forecast is that oil prices will also remain stable. This, at least, is a plausible assumption.
The surprising thing about the Minister's latest inflation forecast is that despite its reliance on a number of questionable assumptions, it is not too far behind the targets set by most economists.
Mr Dan McLaughlin of ABN-Amro is currently forecasting average inflation of 5.3 per cent while Mr Dermot O'Brien of NCB Stockbrokers has put it at 5.4 per cent. Implicit in the Government meeting its new figure is no further taxes on tobacco products in the December budget. Last year's increases in excise duties, combined with the expansionary nature of the budget, has come back to haunt the Government this year in the form of inflation. The tobacco increases will fall out of the CPI in December - bringing it down by 0.8 of a percentage point - and the Government is unlikely to bring in new ones to replace them, said Mr McLaughlin. The new figure also acknowledged the extent to which domestic demand is driving inflation. The Government has previously sought to lay the blame on factors outside its control such as the euro and oil prices. "Services inflation is very high, currently running at 7 per cent (compared to an average of 4.7 per cent in 1999)," according to the Department.
The revised growth forecast of an 8.25 per cent increase in Gross National Product has also been greeted as being more realistic and in line with market expectations. GNP is the value in monetary terms of all the goods and services produced by the economy minus the earnings repatriated by foreign owned firms. Gross Domestic Product, which includes these multinational earnings is set to grow by 10.3 per cent, compared to the previous forecast of 7.4 per cent.
The outlook for exports, - the other main driver of the economy - is also positive. The economies of Ireland's main trading partners, Europe and the US, are all growing strongly. The weak euro is contributing to the competitiveness of the economy and inward investment remains high, indicating that industry will be able to meet demand. The only blot is costs which "are increasing at a much faster rate than those of our main trading partners. Per capita earnings seem set to rise significantly faster than the EU forecast average increases of about 3 per cent - which will lead to a loss of competitiveness in euro-area markets despite faster relative productivity growth," warns the Department.
Despite this, the Department has revised its forecast for export growth from 11.4 per cent to 15.6 per cent, a figure which may still be on the low side. NCB is estimating that exports will grow by 17 per cent and figures due out today are predicted to show that exports are up more than 25 per cent in the year to date. The Department concludes that despite the increasing shortage of labour the economy should be able to sustain further strong growth, albeit at more modest levels.
