Ireland's economy should grow strongly in 2005, the Central Bank said today.
Central Bank bulletin
However, the bank warned that borrowing has outstripped household incomes for the first time.
In its quarterly bulletin, the bank forecast GDP of 5.25 per cent for 2005 and GNP of 4.75 per cent.
"This would represent an economy continuing to grow broadly in line with potential," it said.
However, the economists in Dame Street cautioned that external threats such as the strong euro and volatile oil prices could spoil the growth story.
Domestically, the high level of house prices and the strong growth in credit are a cause for concern, the bank said.
"The bank's outlook is slightly more optimistic than the mid-range forecasts from a survey of 10 Dublin-based economists conducted last week. This put the forecast for GDP this year at 5.05 per cent and 4.55 per cent for GNP.
The bank even moderated its tone about the housing market which has long been a concern.
The bank notes that the underlying annual trend in mortgage credit has eased slightly in recent months, although it is still running at about 27 per cent a year compared with increases of about 25 per cent a year earlier.
"The gradual easing of house price inflation, together with some moderation in housing output from current very high levels, should over time lead to some reduction in the rate of increase in mortgage credit," the bulletin states.
Nevertheless, the bank notes that total debt held by households over the last year, including mortgages and borrowing exceeded disposable income for the first time — by an estimated 13 per cent. This has heightened vulnerability to adverse developments in income or interest rates, should circumstances change, the bank said.
However, this does not indicate a trend of higher indebtedness as disposable incomes were lowered by the stealthy effect of the non-adjustment of income tax bands in the 2003 and 2004 budgets that is borne out by weaker consumption figures.
The bank predicts disposable income will recover as employment growth remains significant, pushing earnings well ahead of inflation.
The increase in disposable incomes is likely to be further enhanced by changes to tax bands in the 2005 Budget to take account of the impact of inflation.
"The reasonably strong growth forecast for Ireland in 2005 is based on a favourable outlook for the global economy and moderate growth for the euro area. In addition, domestic demand is expected to drive output this year," the bank said.
The bank also stressed that inflation must be kept under control. "Price levels remain well above the euro area average and this has had a further negative impact on the exporting sector," it said.