The economy will grow at its full potential next year as a broad-based economic recovery takes firm hold, according to a new analysis from economists at AIB.
Growth in the Republic will be supported in large part by continued "resilience" in the labour market and low inflation, the study finds.
It also points to a general lack of "imbalance" in the Irish economy and the health of the public finances as positive factors for growth.
AIB's chief economist, Mr John Beggs, said yesterday that growth in gross domestic product (GDP), which includes the profits of foreign-owned companies operating in the Republic, should rise to "at least" 4 per cent this year before climbing to the economy's medium-term potential growth rate of 5 per cent. AIB is forecasting growth in gross national product (GNP) of 3.5 per cent for this year and 4.3 per cent in 2005.
The predictions leave the bank's economists at the positive end of the economic forecast scale in contrast to, for example, Davy, which is expecting the economy to contract in 2005.
AIB's economic research team is expecting both domestic demand and export growth to make a "solid contribution" to growth over the next two years.
This will come as companies invest more money in expansion and consumer confidence grows, according to AIB. The bank is expecting "a pretty dramatic pick-up in mergers and acquisitions" over the next two years.
The economists also see less volatility in currency markets, with a dollar recovery possible next year. This would automatically improve the competitiveness of Irish exporters.
Mr Colm Doherty, managing director of AIB Capital Markets, warned, however, that while export growth should be strong next year, it would be based on volume rather than value as exporting firms faced harsh pricing pressures.
"A deceleration in wage growth is probably one of the most important things for Irish companies," said Mr Doherty.
AIB sees wages across the economy growing by 4 per cent over the next two years. Mr Beggs said the prevailing economic position represented an "opportunity" for the national pay talks.
"I don't think growth in wages should be much more than the rate of inflation," he said, recommending that any wage deal should contain a high degree of flexibility.
AIB is forecasting average inflation of 1.9 per cent this year and 2.7 per cent in 2005.
On the public finances, Mr Beggs predicted that the economic upturn would see the general Government deficit climbing no higher than 0.6 per cent of GDP this year. This contrasts with the Government's forecast of 1.1 per cent.
