The economy continued growing strongly in the first quarter of the year but remains dependent on domestic demand, with the construction sector continuing to make a disproportionate contribution to economic growth, writes Marc Coleman, Economics Editor.
According to the latest national accounts statistics released by the Central Statistics Office (CSO) yesterday, gross domestic product (GDP) - the value of goods and services produced in the country - rose annually by 5.8 per cent in the year to March. The consumer price index for June, also published yesterday, shows the rate of inflation remained at a four-year high of 3.9 per cent.
Taoiseach Bertie Ahern said yesterday higher inflation was a sign of a strengthening economy: "In actual fact the reason it's on the rise is because probably the boom times are getting even more boomer."
Economic growth remains strongly dependent on domestic consumption and on housing construction, the CSO growth figures suggest.
The construction of buildings and houses grew by 13.9 per cent and 12.6 per cent respectively, while road and infrastructure activity rose 15 per cent. In contrast, investment in machinery and equipment in the business sector rose by just 4.6 per cent.
The CSO also presented revised estimates of the economy's performance last year. Bill Keating, CSO director general, said the economy had grown slightly more than initially calculated, but that overall productivity growth in the economy had been adversely affected by reliance on the construction sector.
Productivity is output per worker and is seen as a measure of the economy's efficiency.
"Construction saw negative productivity growth last year," Mr Keating said. "Output rose by 9 per cent while employment rose by 14 per cent."
A tentative recovery in construction sector productivity was evident during the first quarter of this year, he added. The share of the economy dependent on the construction sector rose to 17 per cent last year, according to detailed figures from the CSO.
Bank of Ireland chief economist Dan McLaughlin said the figures pointed to continued growth in 2006. "Our own growth forecast of 6 per cent for 2006 as a whole looks realistic in light of the Q1 data," Mr McLaughlin said yesterday.
However, yesterday's data follows several warnings that economic growth is becoming unbalanced. Earlier this week the Irish Exporters Association said that investment in industry was failing to keep pace with investment in property. Central Bank of Ireland governor John Hurley last week warned that the economy was becoming over-reliant on domestic demand and that its vulnerability to interest rate rises was increasing.
In its latest monthly bulletin, the European Central Bank (ECB) yesterday repeated warnings that interest rates would rise early next month.
The bulletin's editorial refers to the need to "exercise strong vigilance" to ensure price stability, a reference widely taken as signalling an imminent rate increase. "Risks to the outlook for price developments remain on the upside and include further increases in oil prices," the bulletin states.
Davy stockbrokers yesterday said that falls in the price of home heating oil had helped to contain the June inflation result, but added that the interest rate rises would push inflation higher in coming months. "The June 8th ECB rate hike of a quarter of a percentage point did not impact last month. It will hit the index in July, pushing annual inflation above 4 per cent," Rossa White, economist with Davy stockbrokers, said yesterday.
Meanwhile, oil prices hit record highs on world markets yesterday, pushing the price of benchmark Brent crude past $76 a barrel.