Consumer caution and the absence of any recovery in investment spending by business will restrain economic growth this year, according to Mr Jim Power, chief economist at Friends First.
Mr Power has cut his forecast for gross national product (GNP) growth this year from 3 per cent to 1.2 per cent and predicts that the unemployment rate could reach 5.7 per cent by the end of the year.
"The outlook for 2003 remains very uncertain and we have revised down our forecasts for all of the major economies for the coming year," he said at the launch of Friends First's latest economic outlook yesterday. "The risks and uncertainties are all similar to last year, with the added dimension of the next stage of the war against terrorism."
The world economy would be struggling, regardless of the uncertainty generated by the Iraqi situation, according to Mr Power. In particular, the US is still working out the excesses of the boom of the late 1990s, with excess capacity remaining in industry and a "massive destruction of equity wealth". The US was recovering, but at a very gradual pace, he said, predicting growth of 2.6 per cent this year, rising to 3.2 per cent in 2004.
This remains ahead of the euro zone, where growth is forecast at 1 per cent this year, recovering to around 2 per cent next year. The European Central Bank is likely to announce further cuts in interest rates, bringing its base rate from 2.5 per cent now to 2 per cent by the end of the year, he believes.
For Ireland, Mr Power predicts continued sluggishness in consumer spending, due to lower wage settlements and bonuses, reduced equity wealth, a difficult budget and job insecurity. He expects consumer spending to rise by just 1.5 per cent in real terms, down from 2.5 per cent last year, with business investment likely to be flat, following a 2 per cent decline in 2002.
The Exchequer finances will remain under pressure, he predicts, and, together with the cost of public pay benchmarking, this will maintain pressure for higher charges to consumers for public services and for new tax revenues.
If there is any risk to the growth forecasts, it is that they might be lower than anticipated, he warns, particularly given the huge uncertainties still surrounding the Iraqi situation.
Turning to stock markets, geo-political uncertainty remains a significant risk, he believes, and the "bubble legacy" from the market overvaluations of recent years will take time to eradicate.
"On a traditional P/E analysis, markets have cheapened but still do not look compelling value in an historical context," he says. On balance, a fourth year of market declines is unlikely but "should positive returns be recorded, they are likely to be quite modest", putting an emphasis for investors on stock selection.
