Central Bank warns debt levels threaten strong economy

The Central Bank has predicted the Irish economy will grow by 5.5 per cent this year but warned of the risk posed by the growing level of personal debt.

At the publication of the bank’s annual report for 2004, Governor John Hurley said although the economy was performing well, the level of private sector credit was now growing at an annual rate of about 25 per cent.

Mr Hurley said: "There is no longer any doubt that the private sector is highly indebted by international standards and that this level will very soon match the levels recorded in Europe’s most indebted economies.

"This is occurring at a time of historically low interest rates so that any significant increase in rates or downturn in economic activity in the future would cause problems, particularly for recent and more highly indebted borrowers."

Mr Hurley said the underlying strength of the economy was reflected in the labour market, with unemployment rate stable at around 4.5 per cent, which he said was probably close to full employment for the Irish economy.

In its report, the bank said the labour market remained strong, with total employment growing by 4 per cent in the first quarter of the year - the fastest rate of growth since the end of 2000.

The bank said the construction sector had contributed significantly to this growth and now accounted for around 12 per cent of employment growth, compared to an average of 8 per cent in the euro zone area.

Mr Hurley said that although the contribution of the construction sector to job growth will be less in the future, "this will be counterbalanced by a pick-up in private consumption and, to a lesser extent, exports".

He said there was now "considerable evidence of an easing in the rate of house price increases".

He said the most recent quarter-on-quarter changes in house prices correspond to an annualised rate of increase of around 4 per cent which, if sustained, would represent a considerably lower rate of house price inflation in 2005 than in recent years.

Mr Hurley said the main downside risks to the bank’s growth forecasts were the recent sharp increase in oil prices the uncertainty over exchange rates.

"In particular, the Irish economy is exposed to any sharp weakening of the US dollar against the euro that might emanate from the large global imbalances," he said.

The bank said the Irish inflation had been reduced to that of the euro area after a number of years of excess inflation. The Irish inflation rate dropped to 2.3 per cent last year, close to the euro area average of 2.1 per cent.

Mr Hurley said in the past this relatively higher rate of inflation had contributed to a deterioration in the competitiveness of the economy.

"It is important, looking forward, to embed this low inflation regime and to protect competitiveness," he said.