A booming economy approaching EMU

This year was the best ever for the Irish economy. Official figures have not yet been released but it is likely that the economy grew by between 7 and 9 per cent. Perhaps one of the most remarkable parts of this growth was that there is still little sign of inflation, although the recently published November figures did show some increase, with the annual rate rising to 1.6 per cent.

For most of the year, the rate of inflation was extremely low. Most governments now consider inflation at below 2 per cent to be "price stability" and the Irish rate remains below this level. The booming economy also led to tens of thousands of new jobs - and over 50,000 were created in 1997.

This was the third year running that the economy boomed, with significantly higher growth rates than most of our partners in the EU and indeed across the globe. In fact, this State is now so successful that we have taken over from the Tiger economies of the Far East as the most remarkable performer on any continent. Most commentators are also optimistic that we can avoid the rapid downturn which has been so marked in the Far East this year - we have far less state supports and the banking system is certainly not in crisis.

This was also the first year we began to see significant falls in unemployment and, by the end of the year, the numbers of jobless had fallen to a 20-year low below 10 per cent.

The one dominant theme which has underlined almost all other aspects of the economy this year was monetary union. It is now only just over four months until the date when we should be officially confirmed as one of the founder members of the single currency. At the beginning of May the EU Commission is due to announce the list of countries which will be participating as well as the rate at which they will join the new currency. This is likely to prove one of the biggest challenges for Irish policymakers.

This year the economy managed phenomenal growth without importing inflation. One of the reasons for this was the higher level of interest rates here than in many European economies.

One month rates have been fairly stable for most of 1997 at 6.25 per cent, although a small rise was implemented in April when the currency came under pressure. One of the results of this is a relatively strong currency within the exchange rate mechanism. The pound has consistently been at the top of the grid for most of the year. At one stage it was trading at almost 13 per cent above the weakest currency in the system - the French franc.

At that time it appeared that the currency could have been pushed above the 15 per cent threshold - with the possibility of becoming ineligible for the single currency. Comments from the then Minister for Finance Mr Quinn added fuel to the selling but later remarks that a revaluation could be sought saw off the speculators and ever since the pound has remained fairly stable against the deutschmark.

The present Minister for Finance's Mr McCreevy's infamous "button lip" approach has left many in the markets in a difficult position but so far appears to have done the trick.

The question of the pound's entry rate into monetary union has still not been sorted out with many still expecting an upward revision in the pound's central ERM rate by the first weekend in May at the latest. This would allow the pound to join at above its existing central rate of DM 2.41, although it would probably still be below its central trading rate of around DM 2.60.

Such a revaluation in the pound's central ERM rate is understood to be wanted by the Central Bank which is worried that a sharp fall in the currency could import higher prices and thus inflation into the economy. Many in the Department of Finance are also likely to be of the same opinion.

However, the Fianna Fail-led Government is likely to listen to the warnings of other commentators. A revaluation of the pound will also, by definition, lead to a revaluation of the farmers' "green pound" and thus less money in support and intervention payments from the EU. It would also hurt exporters, and many of the larger multinationals will do their best to ensure the warnings are heeded.

There is also the worry that sterling is at an unsustainably high level and is bound to fall at some stage over the course of 1998. A large revaluation could thus undermine our competitive position just when we may need it most.

The other macro implication of the single currency is, of course, on interest rates. Irish rates will have to converge with those in Germany and Holland next year and probably so by May, although the Central Bank has been very successful in holding rates up this year. Indeed, recent movements point to a large fall perhaps as early as February. Irish mortgage holders and borrowers can thus look forward to large drops in interest payments of perhaps up to 2 percentage points. Savers, however, will see the value of their savings eroded.

The Department of Finance and the IDA are also hopeful that the jobs gains can be maintained into this year. Ireland is now unequivocably the dominant player in Europe in terms of jobs in the high technology sector. Thousands of jobs were created in 1997 in this area, including those created by giants such as IBM and Boston Scientific.

The other large growth area in the jobs market was in call centres. Projects from firms as diverse as United Airlines and Gateway as well as UPS have created more thousands of jobs in these areas.

While these changes are very welcome, unemployment at 10 per cent is still too high and represents thousands of families with well below average incomes. And the longterm unemployed are still almost as numerous as they have ever been. Mr McCreevy's maiden Budget did little to overcome the welfare to work disincentives and the eligibility for many of the schemes is very tight.

It remains to be seen whether the double allowance for those unemployed over three years will have much impact, although there is a fear among employers that the three-year rule almost by definition means that many of those who are eligible are in fact unemployable.

One other dominant theme for the economy over 1997 was the impending phasing out of structural funds and other forms of assistance form the EU. As a result for the first time ever we had a Government spending large amounts of money on the capital side.

A £100 million educational fund was introduced as well as significantly high spending on roads and a commitment that no matter what decision the EU comes to we will fund the LUAS project for Dublin.

This sort of spending has got to be welcomed as one of the main areas where the economy is in danger is in terms of bottlenecks and infrastructural ineffeciencies.

Overall then we ended 1997 with a booming economy and few obvious clouds on the horizon. But 1998 will bring a whole new range of challenges, particularly preparations for the move to monetary union, due to be completed at the start of 1999.