Perceptions that consumers could create instability in the economy by borrowing too much money are overdone, AIB's top economist said yesterday. Una McCaffrey reports.
Mr John Beggs, the bank's chief economist also scotched worries that economic growth could be too dependent on the construction boom of the past few years.
The economy is, he said, looking into a period of "strong and steady" expansion, based on a number of sectors.
He said the €15 billion windfall from special savings incentive accounts, due to start maturing next year, will act as a "cushion" against any risks. This will happen as growth in consumer spending rises from 1.5 to 7 per cent.
Mr Beggs is also expecting the housing market to settle into a soft landing in the near future. House-price growth is moderating and will fall to 5 per cent or less by the end of this year, according to AIB's analysis.
Prices could increase by less than 3 per cent in 2006, thus reducing the threat of a crash, the AIB's economists believe.
AIB is particularly bullish on the economy's prospects for this year and next, forecasting gross national product (GNP) growth of 5.5 per cent for 2005 and 6.3 per cent for 2006.
The Economic and Social Research Institute recently said that GNP growth would rise from 5 per cent in 2005 to 5.8 per cent in 2006. The Republic's economy is supported by a long list of positive factors, according to the AIB analysis.
These include buoyant tax revenues, strong consumer spending, good employment growth, balanced public finances and high levels of investment.
He believes the current Irish economic performance is very sustainable. Mr Beggs was particularly dismissive of theories that consumer behaviour could be reaching "irrational" levels.
Private-sector borrowing is currently growing by more than 25 per cent per annum. The Central Bank has voiced concerns at how vulnerable these high debt levels would make consumers if interest rates rose sharply.
The ratio of personal debt to disposable income in the Republic currently stands at about 120 per cent and will rise to 140 per cent by the end of 2006, according to the AIB study.
Mr Beggs believes, however, that it makes little sense to emphasise this ratio without making reference to the level of outstanding mortgage debt and the value of housing stock.
This ratio of mortgage debt to housing value stood at 13.5 per cent at the end of 2004, a level which Mr Beggs described as "favourable".
He does not expect any near-term problems from higher interest rates either, forecasting no more than a quarter-point hike in euro zone rates before year's end.
