Davy stockbrokers has upgraded its economic growth forecasts for as it now expects the SSIA-fuelled consumer spending spree to be greater than previously expected.
Davy now expects GNP to grow by 6 per cent in 2006 before slowing slightly to 5 per cent in 2007. The broker had previously pencilled in growth of 5 per cent for this year.
The main source of the upgrades have been much stronger than expected consumer spending.
"Consumer demand this year will benefit from strong income growth, a high savings ratio and the release of €16 billion in SSIA accounts. Early indicators are very strong and we have raised our forecast for consumer demand growth for 2006 from 6.5 per cent to 7.5 per cent," said to Davy's chief economist, Robbie Kelleher.
Construction, which has seen unprecedented growth in recent years, is also expected to have another bumper year. House completions in the first two months of the year started strongly as did the commercial property sector.
"Hence we expect overall investment spending to grow by 10 per cent this year and that should facilitate a further increase of 8 per cent in construction sector output," according to the Davy report.
"All these trends were reflected in the recent buoyancy of tax revenues. For the year as a whole tax receipts are likely to be several billion ahead of the Budget targets," the report adds.
On a more cautious note the broker expects euro zone interest rates to reach 3.25 per cent by the end of this year and to increase further to 3.5 per cent in 2007.
But Davy's economists expect that the momentum generated by consumer spending and construction investment should keep the cooling effects of higher interest rates at bay in the short term.
In the longer term, Davy expressed concerns about the rising level of consumer debt which at its current pace is unsustainable.
Even Davy's forecasts, which factor in a moderation in credit growth, imply that household debt will double to €200 billion by 2008.