Irish economy to power ahead in 2007 but at a price

High-spending consumers should keep Ireland's thriving economy ticking over nicely ahead of a general election later this year but economists, like the central bank, are increasingly worried about the rising pace of price rises.

A Reuters survey of 10 Dublin-based economists published yesterday showed analysts continue to raise growth forecasts for the year ahead but are also increasingly pessimistic about the prospect for a major slow down in price rises.

"The biggest concern in the short-term remains on the inflation side," said Bloxham Chief Economist Alan McQuaid. "The risks remain on the upside and the last thing the economy needs is the government compounding the issue by adding to price pressures in the areas that it has control over."

The Central Bank of Ireland said that growth in Irish consumer prices was set to average 4.5 per cent this year - outstripping last year's four-year high of four per cent - and called for domestic policies aimed at containing inflation.

Economists are not so pessimistic, predicting Ireland's consumer price index (CPI) will rise 3.9 per cent on average in 2007, according to the median of 10 forecasts, but that is higher than the 3.7 per cent anticipated in a December 20 poll.

The picture is also set to worsen before any improvement. "The annual rate of headline inflation is likely to rise to above five per cent in January before decelerating over the balance of the year to some three per cent by end 2007, helped by lower oil prices and a marked deceleration in the pace of growth of mortgage costs," said Oliver Mangan, Chief Bond Economist at AIB Global Treasury.

Economists believe the annual rate of CPI inflation hit 5.15 per cent in January, up from 4.9 in December and breaching the five-per cent mark for the first time since February 2003.

There is also little sign that the central bank will get the slow-down in consumer demand it believes would contribute to a deceleration in price rises. Indeed, economists predict retail sales will surge seven per cent this year, comfortably outstripping the 6.1 per cent outturn expected for last year.

Such demand augurs well for economic expansion, however, with Mr Mangan predicting "another year of stellar growth" for one of Europe's strongest performing, if most expensive, economies.

Gross domestic product (GDP) is expected to hit 5.5 per cent this year which is up from a 5.2 per cent forecast in December's survey if slightly below the 5.95 per cent expected for 2006.

It is a similar picture for gross national product (GNP) which is seen rising 5.8 per cent in 2007 versus a 5.3 per cent median forecast in the last poll and 6.5 per cent seen for 2006.

"Recent economic indicators from around the globe suggest that world growth may surprise on the upside this year," said Bloxham's Mr McQuaid. "I still think Ireland's growth rate will be closer to six per cent than five per cent in 2007."

That should be good for government finances with economists now forecasting a €500 million surplus for this year against the balanced budget they predicted for 2007 just over month ago.

"In an election year government could hardly wish for a better economic background, which will make life tricky for the opposition," said Friends First Chief Economist Jim Power.

One possible source of solace for the central bank, which fears rising costs will damage Ireland's competitive edge over trading rivals, is that economists continue to trim their forecasts for price growth in the booming property market.

They see a rise of five per cent this year, down from a previous forecast of 5.5 per cent and well below last year's 11.8 per cent.