Republic's economic growth expected to slow

Economic growth in the Republic will slow next year as declining competitiveness eats into exports, according to a new analysis from PricewaterhouseCoopers (PwC).

Economists at the accountancy firm are expecting the economy to grow by 5 per cent this year in GDP terms, before posting growth of 4.75 per cent in 2006.

The lower forecast for next year is linked to PwC's expectation that inflation will remain slightly above the European Central Bank's (ECB's) 2 per cent target over the period.

Wage growth will, the firm's economists believe, remain "relatively rapid" in 2005 as skilled labour shortages re-emerge and become acute.

"The further erosion of Ireland's international competitiveness is expected to dampen export growth next year, contributing to the projected slight deceleration in GDP growth in 2006," PwC says in its latest European economic outlook.

PwC's growth forecasts fall comfortably within a range of forecasts already made by parties such as the Central Bank and the Economic and Social Research Institute.

Growth in the region of 5 per cent would suggest that the Irish economy is fulfilling almost all of its economic potential at a time of continued sluggish expansion in the wider euro zone.

For the euro zone as a whole, PwC sees GDP growth of 1.75 per cent in 2005. This would mark a fairly similar performance to 2004, with the firm judging that risks to the euro-zone economy are "weighted to the downside" at the moment.

The economists point to fragile domestic demand in the single-currency area as well as the risk of a faster deceleration in economic growth as risk factors.

A further rise in the euro could also temper growth, according to the analysis. PwC also points out, however, that growth in the euro zone could be more rapid than expected if oil prices fell significantly or the global economy regained momentum.

PwC expects the ECB to keep interest rates on hold at 2 per cent this year, based on low underlying euro-zone inflation. Rates may start rising gradually in 2006 if the economy recovers, according to the analysis.

Any sign of a "relapse" could, however, lead to lower rates at some stage this year, PwC concludes. The firm's economists acknowledge that interest rates are already too low for the Republic's economic needs.

The analysis identifies a further significant decline in the euro/dollar exchange rate as a substantial downside risk to the Irish economy.

A downturn in house prices could also harm growth, it suggests. But PwC concludes that the prospect of a hard landing for housing is remote.