Wage agreements for this year and next should be lowered to reflect the significant fall in the Irish rate of inflation, AIB Global Treasury stated today in its quarterly report.
The bank is bullish on the economy's growth prospects but argued that pay increases must take into account the global trend of falling prices which has lowered the core rate of inflation since 2003.
Due to the strength of the growth in labour supply, AIB predicts a small rise in the unemployment rate to 5 per cent by the end of the year.
However, the bank claims the labour market is very resilient and forecasts employment to rise by 1.6 per cent in 2004 and by 1.8 per cent on average in 2005.
In general, the bank argues that the Irish economy is in robust health with gross domestic product set to grow by at least 4 per cent in 2004 and at close to 5 per cent in 2005.
AIB's sanguine outlook contrasts with a gloomier report yesterday from Davy's stockbrokers, where growth expectations were trimmed back to 2.5 per cent for 2005 compared to earlier forecasts of 4 to 5 per cent.
While the bank maintains that the global recovery is sustainable, Davy's believes US growth will slow next year, dragged down by the ballooning twin deficit and an end to the Bush administration's tax cuts.
On the currency front, AIB believes the recent volatility will lessen with the euro trading below $1.20 on average in 2005.