Ireland's economy is expected to continue to grow strongly, but the over-reliance on construction could make Ireland vulnerable to higher interest rates, the Central Bank warned today.
The Central Bank which warned today of the economy's over-reliance on construction.
In its quarterly bulletin today, the bank reiterated that it expected both gross domestic and gross national product to grow by 5 per cent in 2006 and 5.25 per cent in 2007, echoing comments made in its annual report presentation earlier this month.
GDP grew by 5.5 per cent in 2005 and GNP by 5.4 per cent.
"Growth prospects for the domestic economy remain positive," the bank said. "The economy's average growth rate in recent years has been in line with its potential of 4.5 to 5 per cent and, in the absence of shocks, this pattern seems likely to persist both this year and in 2007.
"A decline in the rate of inflation to around 2.5 per cent on average in 2007 is now expected," it added.
"This projection assumes a moderation in energy price inflation, which is in line with market expectations as reflected in oil futures markets."
The bank said that although overall economic growth rates remained broadly in line with potential, there had recently been a degree of imbalance, with domestic demand driving growth to a much greater extent than before.
"Initially, this reflected significant growth in construction investment, particularly housing investment, but
Central Bank statement
this is projected to level off somewhat," the bank noted.
"It is being replaced, however, by strong demand from consumers boosted, in part, by the maturing of Special Savings Incentive Accounts."
The Central Bank said Ireland's export performance remained muted and there had been some deterioration in the economy's external current account. It warned that despite its strength, the Irish economy was still exposed to external shocks, such as exchange rate appreciation or oil price increases.
"The recent reacceleration of house prices and rapidly rising levels of indebtedness have increased its vulnerability in this regard," it added.
The bank said the external environment remained quite positive, with the growth in the volume of world trade expected to remain robust this year.
However, it warned there were a number of risks, including the persistent US current account deficit and corresponding surpluses in other economies.
"A danger exists that there could be a significant dollar depreciation against the euro as part of the correction mechanism," the bank said.
"This would, undoubtedly, have a significant impact on the domestic economy, one that would be increased if it were to be accompanied by a depreciation of sterling, even if this depreciation were to be on a smaller scale," it added.
Other risks included continuing volatility in oil prices.