Posted by The Central Bank on May 19, 2006 at 15:21:27:
In Reply to: Re: investment property posted by Realist on May 18, 2006 at 21:50:16:
Current 2006 : 12/04/2006
The Central Bank today publishes its second Quarterly Bulletin of 2006. The Bulletin reports that the outlook for the Irish economy remains good. The Central Bank is forecasting GNP and GDP growth for 2006 of about 5 per cent, a small increase on previous forecasts. This is broadly similar to that of last year and is around the economy’s potential growth rate.
While growth in 2005 was relatively strong with GNP and GDP increasing by 5.4 per cent and 4.7 per cent respectively, the breakdown of growth between employment and productivity growth was highly unusual. An increase in employment of 87,000, or 4.7 per cent on average, accounted for almost all of economic growth last year. Productivity increased only marginally as the employment increase was concentrated in the labour-intensive construction and services sector, where productivity increases are traditionally relatively low.
While the economy is generally performing well, areas of concern remain. As regards cost competitiveness, related to the fact that productivity increases were very limited, unit labour costs in the general economy have increased significantly in the past two years. The average increase was about 4˝ per cent a year, compared with an increase in the euro area of about only 1 per cent. Real pay increases, therefore, have been rising faster than productivity in the past year or two. It is important that future pay developments protect competitiveness in the light of earlier losses and increased globalisation pressures.
Looking at the sources of growth, the current level of activity in the house-building sub-sector of the construction sector is beyond what is required over the medium-term, and some contraction will be required at some point. This could present adjustment problems if the contraction were to be quite rapid.
Consumer price inflation in 2005 remained quite low and broadly in line with the euro area average (HICP inflation amounted to 2.2 per cent in 2005). This is expected to be broadly unchanged for 2006. CPI inflation amounted to 2.5 per cent in 2005, but has risen sharply since then, with an annual increase in February of 3.3 per cent; this is a concern. CPI inflation is expected to level off to 3 per cent in 2006. It is important that domestic economic policy promotes conditions that support growth while containing domestic inflationary pressures.
Regarding house price inflation, there was a large annual increase in February of 11.1 per cent. This is a worrying development especially as it represents a significant re-acceleration from increases of 6 to 7 per cent last autumn. While the Bank considers that the most likely scenario is that of a soft landing, nevertheless this re-acceleration increases the risk of a sharp correction in the future. The increase in house prices coincided with some easing of credit conditions by mortgage lenders and seemed, at least in part, to reflect an increased effort on the part of mortgage lenders to market some new products, specifically 100 per cent mortgages. The underlying year-to-year increase in mortgage lending has been running at close to 30 per cent in the first two months of 2006. As mortgage borrowing accounts for more than three-quarters of personal sector borrowing, by end-2005 the ratio of personal debt to disposable income had increased to 132 per cent (115 per cent at end-2004). In this context, it is important that lenders and borrowers take into account the current still very low level of interest rates and that this situation cannot continue indefinitely. Combined with very strong increases in credit to the property sector in general, the economy’s already high dependence on the health of the broad property sector constitutes a significant risk.