ESRI predicts economic growth of 3.5%

The Economic and Social Research Institute (ESRI) has taken an upbeat view of Ireland's economic prospects forecasting that the economy will grow by 3.5 per cent next year, .

In its winter bulletin, the ESRI suggests that the Irish economy is on the cusp of a turnaround. Economist Mr Danny McCoy said the economy would remain below its potential growth rate of 5 per cent but that the improved international economic conditions would bolster good growth.

Signs of a strong recovery materialised in the latter half of 2003 with the ESRI suggesting this recovery can be sustained over the next few years. "While the growth within the EU may lag that of the other major economies, the pick-up in world trade growth in 2004 is expected to be substantial," the bulletin notes.

This is particularly good news for the export-oriented Irish economy and will help to offset some of the significant erosion in relative competitiveness caused by the strength of the euro and the rising domestic cost base.

The ESRI estimates that the Irish economy grew by 2.8 per cent in 2003 with the pick-up in economic activity in the latter part of the year helping to avert further expected job losses.

Unemployment will rise next year however, with the ESRI stating that the unemployment rate will rise in the second half of next year to a high of 5 per cent. It believes the rate of inflation will moderate next year to an average of 2.2 per cent and will still be the highest in the euro area.

The ESRI is also signalling a further dis-improvement in the public finances forecasting that the General Government Balance will show a deficit of around €1.8 billion in 2004. The institute supported the recent Budget, stating that it was appropriate for the underlying macroeconomic conditions. It believes interest rates will remain stable for most of 2004 but could rise by 0.25 of 1 per cent towards the end of the year. Mr McCoy said the timing of any change in interest rates would be dependent on any further weakening in the value of the dollar against the euro.

It believes the dollar will settle at a rate of around $1.25 to the euro next year and that the European Central Bank and the US Fed will raise interest rates.

The ESRI notes that with the imminent expansion of the European Union next year, it is an opportune time to address the competitive challenges in order to ensure that the Irish economy continues to prosper.

"While the macroeconomic conditions and policy framework are improving, a sharper focus on evolving enterprise policy is required to ensure that internationally trading indigenous companies can become a more important source of employment and productivity growth to boost national living standards" it said.