AIB forecasts growth of 4% in GDP for 2002

Growth in Gross Domestic Product of 4 per cent for 2002 has been forecast by AIB, but the bank has warned that the pick up in the economy is very narrowly based.

In its monthly market focus AIB Corporate and Commercial Treasury said the economic downturn troughed late last year when it slumped to zero. It also said the Special Savings Incentive Scheme was contributing to sluggish consumer spending.

"At first glance GDP data would seem to indicate that a solid economic recovery is under way in Ireland," said the report, with GDP growth for the year expected to be 4 per cent.

"Not bad, one might think, for an economy which saw the annual rate of GDP growth slump to zero at the end of last year."

"However the reality is that the pick up in growth is very narrowly based. It is confined to a limited number of export orientated industries, principally chemicals and pharmaceuticals, which account for less than 1.5 per cent of employment in the economy."

Manufacturing output rose by 9 per cent year on year in the seven months from January to July. Within manufacturing, however, output from the chemical and pharmaceutical sectors jumped by 33 per cent, while for all other manufacturing sectors, output fell by 9 per cent on average. "Outside of chemicals and pharmaceuticals, manufacturing and exports are performing poorly this year," said the report.

It said the same was true for the domestic economy. "New car sales fell by 5.5 per cent in the first nine months of 2002. Excluding cars, retail sales rose by 2.1 per cent year on year in the three months to July.

"The strong take up of Special Savings Incentive Accounts has put a severe dent in household spending this year. Meanwhile, despite the apparent robust housing market, overall construction spending fell by 2 per cent year on year in the first quarter."

Business investment has continued to contract, according to the report. It fell by 8 per cent, year on year, in the first quarter. "Both the agriculture and tourism industries are also reporting downturns in activity this year."

Overall the bank estimates that, despite a strong rise in Government spending, growth in total domestic spending slowed to around 1.7 per cent, year on year, in the first half of 2002.

"Combined with the weakness in many export sectors, it adds up to quite a poor performance by the economy. Not surprisingly, this is being reflected in weaknesses in real indicators of activity, such as tax receipts, private sector employment, and credit growth." The bank believes the economy will continue to struggle during the second half of 2002.

On employment it said that if it had not been for the growth in public sector jobs in the first half of the year, the unemployment rate would have risen to close on 6 per cent.

On Government spending the report said voted spending by the end of September was up 20.3 per cent, year on year, compared to a target of 14.3 per cent for the year.

"It is going to be a tall order to get spending growth to decelerate to this target by the end of the year and thus it seems likely that spending will overshoot the target, despite recent cutbacks in some programmes."

An exchequer borrowing requirement of €1 billion or more is a definite possibility.

On the international front the report said the global recovery that began earlier this year is losing momentum, especially in the industrial sector. Surveys show that activity in the manufacturing sector has weakened considerably in recent months.