ESRI Quarterly Report: The economy is set for more strong growth this year and in 2006 but reform is needed in the "sheltered" services sector so that competitiveness can be restored, according to the Economic and Social Research Institute (ESRI).
In a report to be issued today, the ESRI says the economy could be hurt badly by currency movements and interest rate increases in the future unless it becomes more competitive.
The institute argues that imbalances in the US economy will lead to a dollar correction and a stronger euro at some point in the future.
It expects euro-zone interest rates to start rising next year.
"Ireland has the potential to be exposed," the commentary's editor, Danny McCoy, said yesterday. He was speaking at the launch of the ESRI's latest Quarterly Economic Commentary, which includes an upgraded forecast for growth this year.The institute now expects growth of 6 per cent in GDP for 2005, and 5.4 per cent growth in GNP. For next year, the ESRI has pencilled in GNP growth of 5.1 per cent and GDP of 5 per cent.
The first real indications of how the economy performed in the early months of this year will come over the next few weeks when the Central Statistics Office publishes national quarterly accounts.
An analysis from Davy has estimated, however, that GNP growth in the first quarter may have been as low as 3.5 per cent.
Davy's economists base their assessment on the latest balance of payments figures, which show that the Republic's current account deficit - the surplus of imports over exports - reached a record high in the first quarter. Net trade may have subtracted as much as two percentage points from GNP growth in the first three months, according to Davy.
The ESRI says that the economy is being buoyed by strong domestic demand, underpinned by strong housing investment, rather than by any external factors.
It also finds that this boost in domestic demand is filtering through to the public finances, which the ESRI says will be sound for the next few years.
The analysis includes a €1 billion provision for the State's liability on the long-term residential care issue, with about €300 million of this to flow out from the Exchequer this year. The ESRI expects this hole to be easily filled by funds gathered by the Revenue Commissioners from offshore account-holders.
"The economy is red hot," said Mr McCoy. He warned, however, that the stimulus currently provided by domestic demand will not be sustainable over the longer term. Greater emphasis must be placed on costs, he said, noting that services prices have been climbing eight times faster than goods prices.
The new report also highlights oil prices and a rapid unwinding of housing investment as the sources of two potentially major risks to the economy.
Mr McCoy expects the housing market to settle in a "gradual" manner but he acknowledged that oil prices, which this week touched $60 (€49.5) per barrel, had dented the ESRI's latest forecasts.
The institute estimates that another 50 per cent increase in oil prices could shave half a percentage point off growth in its first year, even if two thirds of the increase was temporary.
In year two, growth could be a full percentage point lower, according to the analysis.
