Republic is on course to join the BMW economies of Europe as population expands

The Republic is on the way to becoming one of the BMW economies of Europe. Over the next decade we will become richer than the Germans and French are now, the number of cars on the roads will rise by 60 per cent and the population will grow to over four million. This is the vision outlined in a new report by NCB Stockbrokers, which abandons the normal preoccupation of forecasters with short-term predictions to look at the fundamental forces driving the economy, and what they will mean for our prosperity moving into the next millennium.

And apart from the implications for those commuting in cars the results are encouraging. NCB predicts that sustained growth in the size of the population and in the number of people available for work will help to drive the economy forward, meaning that it can continue to grow at up to 6 per cent a year. And all this at a time when an ageing workforce will slow the powerhouse economies of Continental Europe.

Crucially, our relatively young population means that, unlike most other EU states, we are not facing a drag on our prosperity from having to deal with large numbers of people retiring every year. The average age of our population will not reach the current European level of close to 40 for another 20 years. And with fewer people emigrating, the population size should grow to four million by 2006 and 4.4 million by 2026 a level last seen in the 1860s. This means that large numbers of people will continue to join the workforce each year and if we can continue to manage our affairs properly the economy will be able to grow strongly without fuelling inflation. This does not mean a guarantee of continuing boom growth rates, but does mean that on average we can continue to grow much more rapidly than the rest of Europe and our wealth standards can move closer to those of the richest EU states.

So what will it mean for the amount of money we have to spend and where we spend it? The brokers believe that looking at trends from the US from the late 1960s onwards can provide useful pointers. This was the era when the post-war "baby boomers" started to come of age, the US labour force rose sharply and the number of new households being formed increased in line.

"Ireland may be characterised in the late 1990s as at a similar demographic position," it states.

Drawing on the US experience, NCB says that the rising labour force and the increasing number of people in the over-20 age group will translate into a rapid rise in the number of new households being formed. The total number of households is expected to rise from 1.123 million in 1996 to 1.245 million in 2001 and 1.387 million in 2006.

And this leads to the first main result in how we will spend our money, which is that more and more will go on housing, as increasing numbers of people either seek to buy their own homes or move into rented accommodation. The latest figures show that, on average, £1 out of every £10 we spend goes on housing, a relatively low figure internationally, with the US standing at 18 per cent. This percentage will grow, as more people move into home-owning and renting.

This means the building boom will continue and the longer-term issues raised in the Bacon report, on supplying sufficient serviced land and supporting infrastructure such as roads, will move into sharp focus. Housing starts are likely to continue apace, averaging 30,000 per annum until 2006 there were 38,000 last year.

Meanwhile, the continued demand for new houses is likely to underpin prices and continue to make life difficult for young first-time buyers. No forecast for house price trends is given, although the implications of a continued high level of demand are obvious. And the brokers believe that "evidence is already emerging that the rental market may become a much more important component of expenditure on housing in Ireland in the future". House insurance, meanwhile, could be a boom sector.

More households mean more spending in the economy, particularly as continued strong economic growth will mean that average wealth will continue to rise strongly. And if people are wealthier, they will spend more. At the moment, the average Irish household spends 25 per cent less per annum than a US one, but "the catch-up in prosperity from here is likely to be dramatic". Annual expenditure per household in 2006 is estimated to be over £24,000, some 50 per cent higher than in 1995, when the last measurement of household spending was taken. In turn, the 1995 figure was 40 per cent up on the previous 1987 survey.

The economy is now set to benefit from the well-educated products of the baby-boom moving into the jobs market. The high numbers aged under 20 in the Irish population has held back prosperity in recent years, but the payback will now come as they enter the jobs market. The percentage of households headed by someone in the prime earning years of 35 to 54 is set to rise sharply people in this age group spend more than 20 per cent above the average each year.

As well as housing, the three areas which show most potential for attracting higher spending growth are pensions and insurance, transport and entertainment and leisure. Meanwhile, the percentage of income spent on basics such as food will fall, as the economy gets richer.

Health insurance and pensions spending are low compared to the US less than £1,500 per head on average in 1995 but will rise as more people move into older age groups and become wealthier. However, unlike elsewhere in Europe, the Irish population will not age enough to increase spending on health services until well into the next millennium.

More money in people's pockets will also be reflected in a big increase in money spent on entertainment and leisure in all its aspects. Not surprisingly, the proportion of income spent by the average earner in the US is 5 per cent of the total, well ahead of 3 per cent in Ireland. We already spend well up to the US norm on fees and admissions to the cinema and other events and this constitutes the main area of entertainment spending. Spending on purchases of items like televisions, videos and other goods linked with recreation is well below US levels; for example we spend less than £100 on TV and sound equipment per annum, compared to over £250 in the US. So spending in this area should rise sharply.

The forecasts should not be seen as a guarantee of future prosperity, of course. They show what the economy is capable of achieving and hold out an enticing vision of what could be achieved after another decade of strong economic growth. But the BMW is not in the garage yet.