Davy Stockbrokers said today it expects the Irish economy to grow by 3 per cent this year and consumers should "feel" the recovery a lot more in 2004 as inflation continues to fall.
In its latest assessment of the economy, Davys said the combination of benign fiscal policy due to improved Government finances and continuing low interest rates should allow the State to piggy-back on the global economic recovery.
A GNP growth rate of 3 per cent would once again position Ireland towards the top end of the European growth league, and well ahead of the region average, which is currently expected to weigh in at about 1.5 per cent. However it warned that a surging euro and an increasingly frothy property market could jeopardise this scenario.
The broker, which has been one of the gloomier forecasters in recent years, said that real incomes should benefit from a sharper deceleration in the rate of inflation than many expect.
Davys expects inflation to continue to decelerate sharply over the next few months, with the annual rate averaging just 1.3 per cent in 2004.
Employment is likely to lag behind the growth cycle and is expected to show only a modest improvement in the current year. Davys expects the unemployment rate to rise to 6 per cent by year-end due to the increase in the labour force.
Given the recovery in business confidence in the latter part of 2003, investment should bottom out, though a fall-off in housebuilding activity is expected following the unprecedented level of house completion recorded in 2003 which is expected to reach 67,000 units.
The two main weaknesses to the Irish economy remain the erosion of competitiveness due to higher wages and a strong euro and the residential property market, Davys said.
During 2003 the euro appreciated by 20 per cent against the dollar and by 8 per cent against sterling. "This must have a significant dampening influence on an economy as open as Ireland's, particularly given that wage inflation here continues to run at a rate well ahead of our trading partners" Davys said.
Davys also maintained that the rate of growth in the residential housing is unsustainable and some downward adjustment is inevitable. Such an adjustment in a sector which accounts for more than half of total construction output and about 5 per cent of overall economy-wide employment could be painful.