The Government has significantly increased the cost of electricity, waste and water supplies to pay for the "politically driven benchmarking process", a leading economist said today.
Jim Power, chief economist at Friends First, said through such actions the State was contributing to relatively high service sector inflation.
"The dramatic increase in inflation on utilities is also contributing towards the decline in manufacturing, raising serious concerns on the future of the sector in the Irish marketplace," he said.
Speaking at the publication of the Friends First Quarterly Economic Outlook, Mr Power said small and medium businesses were being put under particular pressure.
He said this extra pressure exerted on companies as a result of the Government’s need to raise extra revenue was eating into corporate margins and should be kept in mind when negotiating the second phase of benchmarking."
Price rises in utilities are running at multiples of annual inflation. The annual inflation rate is at 2.4 per cent. However, water and waste charges have increased by 36.4 per cent in the last year, hospital service charges have risen by 12.6 per cent and primary education costs by 13.1 per cent, he said.
For investors, 2005 is among the most challenging year for a decade with the property market in Ireland moving to equilibrium with house price growth of around 6 per cent.
As a result many investors were looking overseas for improved returns. "Investment portfolios should have a combination of different asset classes, with equities offering good potential in the medium term. Institutional demand for bonds is still strong reflecting strong demand from pension funds with liability concerns," said Mr Power.
The economist also noted that the defeat of the European Constitution had placed a question mark over the future unity of the EU. However, he said while the break-up of the single currency was unlikely, markets were likely to avoid the euro for the immediate future and a further strengthening of the dollar seems likely.
