Economy looks set for more growth in 2005

Forecasts for the Irish economy are uniformly optimistic, despite concern over the impact of further dollar weakness, writes John McManus

The fortunes of the US economy, and by extension the dollar, will continue to dominate the outlook for the Irish economy in the coming year. While analysts are uniformly optimistic, projecting economic growth in the region of 5 per cent, all temper their forecast with concerns about further dollar weakness.

In their winter bulletin, the Economic and Social Research Institute (ESRI) warns that the scale of the imbalances in the US economy - its current account and trade deficits - is the main threat to global economic stability. The institute is forecasting an average dollar/euro exchange rate of €1.30 for the year, which will knock a few points off economic growth, but it argues the economy is relatively well positioned to cope with further erosion of the euro's competitiveness.

The silver lining of the weaker dollar is a relatively benign outlook for domestic inflation, which will be helped by cheaper US imports, and is expected to average 2.1 per cent.

Further gains in employment are also expected, but the 2.6 per cent growth seen in 2003 is predicted to moderate to nearer 2 per cent. Analysts are predicting that consumers will rejoin the party in 2005 after a couple of years of relatively slow growth in consumption.

The optimists are hoping for a 3.5 per cent increase in consumption next year, some way ahead of the 2.8 per cent increase posted for the 12 months to the end of last September.

On the downside, house prices and consumer credit continued to grow strongly during the year at rates that many consider unsustainable. The tipping point may come if a predicted rise in European interest rates materialises before the second half of the year. And that, in turn, will probably depend on developments across the Atlantic and elsewhere.

As Chris Johns writes in his analysis of the global economy on page 5 of this supplement: "without concerted action on the global stage, the gloom merchants will eventually be proved correct".

Part of any restructuring will involve an improvement in the US trade deficit with Asia, but as Clifford Coonan writes from Beijing, also on page 5, Chinese economic growth shows no sign of letting up in 2005 and a revaluation of its currency is unlikely.

Two men who will not have to worry about this are UCD's Brendan Walsh and Trinity College's Dermot McAleese. The two grand old men of Irish economics are stepping down and on page 4 they reflect on what they have seen and participated in over the last 30 years.

The rise in interest rates may finally take some of the heat out of the property market, where prices grew by 8.1 per cent in the first 10 months of the year, a slight decrease on the 10.9 per cent recorded in the same period in 2003.

Last year was a record year for housebuilding with around 80,000 new homes built during the 12 months, and around half of them thought to be either investment properties or second homes. The buy to let market remains strong but, as Laura Slattery writes on page 7, finding the right property may not be as easy as before.

The low interest rates environment in 2004 contributed to a spectacular performance by the Irish stock market, which outperformed all other European markets bar Belgium. Another strong year is in prospect, but quite how strong depends on which broker you talk to, writes Jane O'Sullivan, markets correspondent, on page 8.

The two newcomers to the market, Eircom and C&C, finished well after shaky starts as their strong dividend policies found favour with investors. It is hard to predict if there will be any new recruits in 2005 as the lower costs and lighter regulatory environment of the Alternative Investment Market in London proved a powerful draw for Irish companies in 2004. EiRx, CNG, Smart Telecom, Circle Oil, Clearstream Technologies and Andor Technology all opted for AIM in 2004.