Davy report dampens oil jitters

The Irish economy would not be facing a "calamitous collapse" even if oil prices reached $100 (€80) a barrel and even at current price levels growth will remain strong, a new report suggests.

The report, from Davy Stockbrokers, dampens down some recent commentary which suggested Irish economic growth would be placed in serious jeopardy because of high oil prices.

The report from Robbie Kelleher and Rossa White points out that oil imports now account for less than 2 per cent of gross national product (GNP) whereas 20 years ago they accounted for 6 per cent of GNP.

If oil prices reach $100 a barrel, they suggest, it would add 0.8 per cent to the consumer price index and this would prompt Davy to revise down its forecasts for economic growth, but they add "we would still be a long way from foreseeing the calamitious collapse which some media reports already suggest is imminent".

The economic comment suggests that Irish ecomoic growth is remaining resilient despite recent pressures. "Even allowing for the lower base implied by the most recent data, we have only tweaked down our GNP forecast for this year from 5.1 per cent to 4.7 per cent and expect growth of close to 4 per cent in each of the next two years".

The report describes this performance as very strong. "That is a pretty impressive performance in that it not only incorporates higher oil prices, but also assumes that annual house completions will fall from 77,000 in the current year to 67,000 by 2007".

The report places stong emphasis on the benigh outlook for inflation and interest rates at present. "Mortgages rates are lower than last year, given more intense competition in the sector," it states.

It says for the vast majority of householders there was no increase in mortgage costs over the last 12 months.

It says nominal incomes are rising by about 5 per cent; numbers in employment are increasing by close on 4 per cent and income tax rates have been reduced. "Hence in spite of the 50 per cent increase in oil prices, real spending power in the Irish economy will improve significantly this year".

"Some of the media coverage last week hinted that the rise in oil prices had reached a point where it might seriously impair the performance of the economy. In our view that greatly exaggerates the likely impact".

The report suggests that gloomy assessments about the impact of oil also assume the euro will not gain further strength against the dollar. It says this cannot be taken for granted.

"In recent weeks the euro has been recovering nicely against the US currency and we believe it will continue to do so over the balance of the year," the authors add.