Irish consumers will be able to bear the cost of higher interest rates as SSIA holders divert their funds to pay off debts, a leading stockbroking firms said today.
Writing in his firm's latest economic commentary, Dermot O'Leary, chief economist with Goodbody stockbrokers, estimates that the household debt burden will continue to increase in line with higher interest rates.
The burden of covering interest on debt - which was estimated at 5.4 per cent of disposable income in 2005 - is set to rise by 9.9 per cent in 2008 as the ECB increases interest rates.
Mr O'Leary's bases his forecasts on the ECB increasing rates by a further half point in 2006, before increasing to 3.5 per cent by the end of 2007 and 3.75 per cent by the end of 2008.
He highlights consumer spending as a key driver of growth in the near term. "Following a surge in consumption growth in 2007 of 7 per cent associated with the €15.7 billion released from SSIAs, base effects will contribute to a marked slowdown in the following year."
The construction sector which has underpinned recent growth will inevitably slow, but some of the slack from slower house builing will be taken by larger infrastructure projects, according to Mr O'Leary's analysis.
Despite rising indebtedness the overall outlook for the economy remains positive given the favourable population structure and healthy state of the public finances.
"While we expect economic growth to slow to closer to trend levels in 2008, we do not anticipate a sharp adjustment. Moreover, GDP growth of close to 4 per cent in that year would still be impressive in an international context"
Such a scenario would be deserving of the tag of a "perfect soft landing," Mr O'Leary concludes.