The outlook for the Irish economy remains bright but the forthcoming partnership talks must ensure guarantees on wage restraint if job losses in the export sector are to be avoided, AIB said today.
The bank's latest economic outlook is generally upbeat on the medium term prospects for the economy forecasting growth rates of 4.5 per cent for 2005 rising to 5.5 per cent by 2007.
Recent conflicting statistics have sparked a debate among economists about the real health of the economy with many private sector economists and think tanks forecasting much higher growth rates than the GNP measures calculated by the CSO.
Recent figures reported employment growth of 5.1 per cent in the second quarter of 2005 but GNP growth of only 3.1 per cent in the same period, implying a sharp drop in productivity.
AIB believes that recent fears about a drop in productivity which is vital to sustaining living standards have been overstated. In the transition to a services economy slower growth in overall productivity is to be expected but cyclical and structural factors must be separated.
The bank concludes that productivity growth is best measured on a trend or multi-year basis. "Using this approach, Irish productivity growth is still capable of delivering trend, non-inflationary GDP growth of 4.5-5 per cent over the medium term."
AIB also reckons that the CSO has understated the strength of the external sector in recent years and expects that the agency will revise upwards its estimates later on in the year.
While the economy's overall performance remains solid cost pressures remain a problem for manufactured exports. The bank warns that "both the government and the private sector must work to re-establish our international competitiveness, which has clearly deteriorated in recent years."
To this end AIB states that it is imperative that forthcoming pay talks, "whether national or otherwise" fully recognise the transient nature of the recent rise in Irish inflation, which has reached 3 per cent and could go higher in the months ahead. The medium term outlook is for a more moderate underlying inflation rate of 2.5 per cent or less.
As Ireland moves from being manufacturing to services, consumer spending will become an increasingly powerful determinant of growth in the future.
Many economists have pointed out that Ireland's savings rate is well above the EU average possibly due to the SSIA scheme. With these accounts close to maturity pent-up consumer demand could lead to lead to spending spree in the coming years which will underpin GDP growth, according to AIB's analysis.
The bank remains "very confident" about the outlook for the Irish housing market as the booming labour market should guarantee that housing demand remains buoyant.