Economy to grow by 6% - B of I

The economy will grow by 6 per cent this year, driven by recovering export markets and buoyant consumer spending, according to Bank of Ireland economist Dan McLaughlin.

That growth will be matched in 2007, the bank forecasts, as alongside the impact of maturing SSIAs, strong economic growth and rising property values boost the Exchequer and allow Minister for Finance Brian Cowen to deliver another expansionary budget in 2007.

The bank, which yesterday released its quarterly economic commentary, expects consumers to continue driving the economy, with spending growing by 8 per cent.

"The global picture has rarely been better. It's a performance not seen in 30 years," said Dr McLaughlin.

The bank expects world economic growth to remain at 5 per cent this year.

As a result, it predicts that the Republic's export growth would recover, following a poor 2005.

Dr McLaughlin said employment would remain strong and would support the recent growth in house prices.

But he added that a tight labour market would make it harder for the Government to get value for money from public spending. "If you have a full employment economy, can you spend more money in real terms? More of it goes in higher prices than output," he said.

Recent increases in inflation were caused by rapid growth of so-called "high street inflation", which measures the cost of a regular shopping basket, especially food prices, Dr McLaughlin said.

"I think average inflation is going to be about 3.5 per cent as higher interest rates offset the unwinding of energy price inflation."

House price growth will reach 15 per cent this year before slowing next year, according to Dr McLaughlin, who predicts that the European Central Bank (ECB) will increase interest rates by a full percentage point over the coming 12 months.

Of the €16 billion in SSIAs set to be released into the economy over the coming 12 months, the bank estimates that some €4 billion will be spent.

Dr McLaughlin said SSIAs would help to sustain house prices at their present levels.

Higher interest rates would impact on next year's house price inflation, he added.