Irish economic growth will be weaker than previously expected as the global economic downturn lingers, leaving Ireland particularly vulnerable, according to Friends First economist Mr Jim Power.
In its latest quarterly economic commentary, Friends First cut its GNP forecast from 3 per cent to 1.2 per cent, reflecting a more cautious consumer and a failure of business investment spending to recover.
Speaking at the publication of the report today, Mr Power said the widely anticipated global recovery failed to materialise in 2002 and the outlook for 2003 remains very uncertain.
"It is convenient to blame the current global economic uncertainty on global geopolitics, but the reality is that the world economy would be struggling regardless, of the uncertainty generated by the Iraqi situation," Mr Power said.
"The general expectation is that the US will lead the global economy out of the slowdown, but the US engine is not running terribly smoothly at the moment".
The combination of over-investment during the technology boom, lower corporate profits and the resultant carnage seen in equity markets will continue to undermine the US economic outlook, according to Mr Power.
Commenting on Ireland, Mr Power that the key for future growth in the Irish economy is to retain competitiveness. "If we lose control of wage costs and overall domestic inflation we are out of the game and we will not be in a position to continue to grow our economy," he said.
Speaking about the public finances he stressed that scarce Government resources should be spent wisely and that 'value for money' assessments become a permanent feature of public spending.
Mr Power also pointed out that but for the creation of 22,700 jobs in the public sector, employment would have fallen by 5,000.
Commenting on the housing market in 2003, Mr Power said the outlook for the sector is more uncertain than usual, but despite deteriorating economic circumstances it is unlikely that house price inflation will level off.
The lower interest rate environment and continued strong interest from investors and owner-occupiers will ensure continued strong demand for housing.
On equities, Mr Power remains cautious. On a valuation basis shares look cheap in the current low interest rate environment but a resolution of the Iraq crisis is necesssary to restore investor confidence.