PricewaterhouseCoopers’ latest economic analysis shows Ireland’s economy growing by an estimated 5.9% in 2006 and a projected 5.1% in 2007, keeping Ireland at the top of the Euroland growth table in both years. The pace of growth for the Euroland economy as a whole is estimated at 2.7% in 2006 and a slightly slower 2.1% in 2007.
The report highlights the role of domestic demand in Ireland’s robust pace of economic growth in recent years, with the contribution of the domestic economy expected to have outweighed that of the export sector for the second year running in 2006. The report argues that domestic demand is likely to continue to be the main driver of overall growth despite slowing consumer spending in 2007. Consumer spending growth is expected to slow as interest rates rise further and employment growth weakens. However, the release of funds from maturing government backed savings schemes is likely to provide a boost to disposable incomes and underpin consumer spending growth over the course of the year.
On the external sector, expectations of high inflation and rising labour costs could lead to a continued erosion of Irish export competitiveness in 2007. Ireland’s unemployment rate was one of the lowest, while its rate of inflation was amongst the highest of the Euroland economies by the end of 2006. In addition to competitiveness issues, the report finds that Ireland’s export sector is likely to suffer from slower growth in its main export market in 2007, as the US and major Euroland economies are expected to slow later this year.
The report suggests the Euroland economy maintained a healthy pace of growth in the final quarter of 2006 and for the year as a whole is likely to have grown at the fastest pace since 2001. However, a slowdown is anticipated in 2007 owing to tighter fiscal policy in a number of member states, the lagged effects of past ECB interest rate rises, further possible appreciation of the euro and an expected slowdown in the US impacting on Euroland exports growth.
Euroland Inflation is expected to average 2% in 2007 and the ECB is likely to raise interest rates to 3.75% in the first quarter of the year in response to upside risks to inflation. A further 25bps interest rate rise later in the year is anticipated in order to contain price pressures and anchor inflation expectations.
Yael Selfin, Senior Economist at PricewaterhouseCoopers, commented that:
“The Irish economy looks set to continue as the Euroland’s top growth performer this year. Unfortunately Ireland is also likely to remain at the top end of the inflation league table, to the detriment of the important export sector and some areas of domestic demand. ”
Notes to editors
1. The table below sets out PricewaterhouseCoopers main scenario for economic growth in the Euroland and UK economies in 2006 and 2007:
Table 1 – Euroland & UK real GDP growth prospects
| Growth rate (%) |
2005a |
2006e |
2007f |
| |
|
|
|
| Euroland |
1.4 |
2.7 |
2.1 |
| Ireland |
5.5 |
5.9 |
5.1 |
| Luxembourg |
4.0 |
5.5 |
4.5 |
| Finland |
2.9 |
4.8 |
2.9 |
| Slovenia |
4.0 |
4.8 |
4.2 |
| Greece |
3.7 |
4.0 |
3.5 |
| Spain |
3.5 |
3.7 |
3.2 |
| Austria |
2.0 |
3.3 |
2.4 |
| Netherlands |
1.5 |
2.9 |
2.8 |
| Belgium |
1.1 |
2.8 |
2.3 |
| Germany |
0.9 |
2.5 |
1.6 |
| France |
1.2 |
2.0 |
1.9 |
| Italy |
0.1 |
1.8 |
1.4 |
| Portugal |
0.4 |
1.1 |
1.4 |
| |
|
|
|
| UK |
1.9 |
2.7 |
2.6 |
| |
|
|
|
Source: Eurostat actuals (a); PricewaterhouseCoopers estimates (e) and forecasts (f).
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