• Falling residential construction to dampen GDP
   
• Sharp fall in headline inflation expected
   
• Government’s fiscal position is not a cause for concern
   
• Two rate cuts expected by ECB in second quarter of ‘08

ECB President Jean-Claude Trichet - - The Governing Council is expected to keep its key interest rate on hold at 4.00% when it meets in Frankfurt tomorrow - - Nov 08, 2007 - - the economic backdrop is uncertain with the continuing credit turmoil, although not as much of a present danger as it was last August; surging oil and food prices and the falling US dollar at a time when Eurozone inflation in October surged to 2.6% compared with the ECB target rate of 2%. However, speculation on interest rate cuts is premature.

"The Irish economy expanded rapidly in the first half of 2007 - GDP grew at an annual 6.7%, with final sales (GDP excluding stock-building) expanding by over 8%. This GDP performance is well above the 5.4% growth trend established since 2000 but activity looks set to slow somewhat over the next eighteen months, primarily reflecting a housing market correction. This will result in GDP growth of 4% in 2008, following a 5.3% average for this year as a whole, before a recovery in 2009, to 5%," according to Bank of Ireland’s Quarterly Economic Outlook* published today.

*current issue not added online at time of our posting

Dr. Dan McLaughlin, Group Chief Economist, Bank of Ireland said: "The supply response to the softening in house prices has been pronounced, with completions set to decline to 72,000 this year from over 88,000 in 2006, and to 58,000 in 2008. This is ultimately supportive of house prices. House building will not fall forever, and our expectations of a growth rebound in 2009 is partly due to a forecast upturn in completions in that year.

"The other components of national expenditure are forecast to remain supportive of growth in 2008. Consumer spending which is set to grow by 4.5% in 2008 following a 6% expansion in 2007 is in line with the growth in real household income, and highlights the absence of any pronounced SSIA impact on spending. The corollary is that consumer outlays are unlikely to fall away sharply, and the more modest projection for personal consumption in 2008 reflects a slowdown in household income growth, to around 7% from 9.5%. This in turn largely reflects lower employment growth as net job creation may emerge at 43,000 against 72,000 in 2007.

“The Government's fiscal position is not one to prompt concern. The Minister for Finance has announced a spending total for 2008 which is virtually identical to that signalled twelve months earlier, and tax revenue is forecast to exceed day-to-day spending by €6.0bn, which hardly suggests the need for revenue-raising measures", concluded McLaughlin.

In 2006, Dan McLaughlin forecast a year ago that the European Central Bank's key rate would peak at 3.50% whereas it was raised to 4.00% in June 2007 and was planned to rise to 4.25% in September 2007 but for the onset of the global credit crunch in August.

Following the meeting of the ECB Governing Council in early October, Holger Schmieding, European economist at Bank of America, said: “It would probably take a dramatic, protracted and wholly unexpected downturn in the economic data to trigger any rate cut discussion in Frankfurt.”

Given the movement in oil prices, the surge in food prices, the US Federal Reserve's hope to hold the federal funds rate at 4.5%, the fragility of the US dollar, in particular in relation to what the Chinese could do with even a small part of their $1.43 trillion in reserves and the rise of Eurozone inflation above the ECB's target rate, forecasts of interest rate cuts by mid-year 2008 from today's vantage point are in the realm of the unknown. It's a bet with a 50% chance of being right.

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Market Outlook - Fortis Investments: Euro/USD rate to reach $1.50 by mid 2008; ECB interest rate rise unlikely; Rate cut equally unlikely until end of 2008