Growth forecast despite interest rates and weak dollar
Niall Dunne of Ulster Bank today compared the economic situation in the 1970s with the present day, and concluded that Irish businesses will face a weaker dollar and higher interest rates in the near future, just as they did 30 years ago.
In the bank’s Global Economic Forecast for 2005, Dunne says that the global market is underestimating the risk of inflation, policy reaction could result in higher interest rates and that worsening deficits will weaken the dollar
High oil prices in the early 1970s contributed significantly to a fall in global GDP from 6% in 1973 to just 1.9% in 1975.
However, the current outlook is more optimistic, according to Ulster Bank, since the global economy is now less dependent on oil.
Ulster Bank predicts that higher oil prices will knock no more than 0.5% off global GDP in 2005. “Oil is nowhere near as expensive as it was in the 1970s. In real, inflation-adjusted terms, oil in the 70s hit highs nearer to $80 (€61.20) a barrel,” said Dunne.
However, if growth remains strong next year, then markets could be underestimating the risk of inflation, according to Dunne.
“Central banks are keeping interest rates low in response to higher oil prices, just as they did in the 70s. However, in the 70s, a prolonged period of loose monetary policy saw inflation soar, and rates eventually had to rise sharply to cap prices,” he said.
In his dollar outlook, Dunne also draws parallels from 30 years ago. In 1972, when Republican President Richard Nixon was re-elected, his administration was faced with a budget deficit and a costly war in Vietnam.
“Republican President George Bush has just been re-elected with the worst budget deficit in history and America is involved in another war,” Dunne said.
“In Nixon’s case, the value of the dollar fell, and in Bush’s second term, we look for history to repeat itself.
“By drawing comparisons with the 1970s we can learn from the past. We may not be able to hold back the tide, but we will at least have time to prepare for a stronger euro and a weaker dollar.”
