ECONOMY

Growth rate seen high but weaker

The growth rate of the country’s gross domestic product (GDP) will remain high but somewhat lower in 2008, a think-tank report released yesterday said. The business-sponsored Foundation for Economic and Industrial Research (IOBE) also said that the factors making for uncertainty as to whether such high rates are sustainable are increasing. The study notes that the economy has grown by an estimated 4 percent this year, mainly on brisk domestic demand, consumption and investment, thus maintaining the long string of annual performances in excess of the EU average. This has brought the country’s per capita income to about 85 percent of the EU-15 average, against 70.9 percent 10 years ago. IOBE says that the main factor causing concern about maintaining the brisk growth rates is the possible slowdown of the world economy due the credit crunch and the steep rise in oil prices. On the domestic front, the most serious problem is the loss in competitiveness, as reflected in the growing external account deficit. Additionally, the prospect for intensifying inflationary pressures throughout the EU is leading to higher interest rates which will impact the main growth-propelling sectors. The likelihood that inflation will remain high appears stronger because the intensity of the factors feeding it has remained strong. In fuel prices, for instance, we have had rising incomes, consumption and costs without an improvement in productivity. By contrast, the rise in the value of the euro against the dollar, the European Central Bank’s interest rate policy and imports from low-cost countries have had a dampening effect on inflation, IOBE notes. Fiscal progress The study argues that fiscal adjustment over the last three years has had a positive effect, with a continuous fall in the debt and deficit. «Nevertheless, this success does not permit relaxation and, for this reason, the 2008 budget correctly targets the further trimming of the debt and deficit, with a view to eliminating the deficit in 2010 and achieving a surplus deficit thereafter,» the report says. On the whole, IOBE finds, fiscal policy is headed in the right direction but questions arise as to its sustainability, mainly from the fact that the reduction in the deficit is mainly the result of a rise in revenues and not due to reining in expenses. The study says a particularly positive element in the 2008 budget is that it introduces for the first time methods which can improve its drafting and implementation.