B of I more bullish on economy

Bank of Ireland's chief economist has hit out at recent negative forecasts for the Irish economy, saying they were not supported by economic data.

Speaking to the Irish Home Builders' Association, Dan McLaughlin said most of the current economic indicators - retail sales, industrial production, foreign travel and unemployment - did not suggest any softening in the pace of economic growth. "Consequently, I still expect 6 per cent growth in 2007, easing to 5 per cent in 2008."

This forecast is higher than those made by the Central Bank, the Economic and Social Research Institute (ESRI), Davy Stockbrokers and AIB.

The Government forecast at the end of last year that gross domestic product (GDP) would grow by 5.25 per cent in 2007, and 4.6 per cent next year.

Dr McLaughlin said it was not clear from some of the more bearish forecasts on the economy whether the authors envisaged a cyclical slowdown or a structural shift in Irish growth.

"There are a number of economic viewpoints about the Irish economy which are often voiced but have little in the way of support from the facts.

"It is not obvious why the potential growth of the Irish economy should fall from 5.5-6 per cent to 3.5-4 per cent in 18 months as it would require a sharp fall in productivity or a substantial fall in labour force growth," Dr McLaughlin said.

"Some even argue that the Irish potential growth rate is not currently in this 5.5-6 per cent range, but if lower, unemployment would have surely fallen, when in fact it has been very stable over the last few years."

He said the housing market had clearly slowed and house prices were likely to be flat or show only modest growth as interest rate rises make property unaffordable for many buyers.

However, the risk of a sustained and substantial decline in prices was not high, largely because the labour market remained tight and unemployment low.

He said a soft landing had already occurred in Ireland in 2001-2002, when house prices fell by a cumulative 4 per cent in the five months from August 2001. "Moreover, the past five years has seen examples of soft landings after housing booms in the UK, Australia and the US."

Strong housing activity was likely to remain a feature of the Irish economy for some time. House completions would probably fall to around 80,000 this year and down to 70,000 in 2008 in response to a cyclical slowdown in demand. A more rapid fall was possible and would dampen GDP growth, but also support house prices.