EU revises upwards forecasts for growth, inflation

The European Commission, in its autumn economic forecasts, has revised upwards both its spring predictions for growth in the Irish economy and those for inflation, although the latter will moderate.

After a "very strong performance in 1999" with real GDP growth of 9.8 per cent, the economy is expected to expand by a further 10.5 per cent this year, 8.2 per cent in 2001, and 7.1 per cent in 2002.

In the spring, the Commission predicted GDP growth at 7.5 per cent this year and 6.2 next year.

The inflation picture is not so healthy, although the Commission forecasts a decline in harmonised Consumer Price Index inflation from 5.5 per cent in 2000 to 3.7 per cent and 3.1 per cent in subsequent years. In the spring its CPI projection was 3.5 per cent this year and 2.8 per cent next year.

The report says the surge is largely due to one-off factors such as the oil-price hike and the budget increase in tobacco prices, but that inflation in services - 6.2 per cent in the first nine months of the year - is also significant.

Competition in retail markets is expected to ease pressures, but "the rapid pace of house price increases . . . is unlikely to slow down any time soon, and generous rises in compensation per employee are expected to continue to create inflationary pressures over the forecast period".

House prices are also likely to dampen net inward migration and constrain employment growth, halving this year's 5 per cent increase by 2002.

Workers' improved bargaining position in a tight labour market is expected to push up compensation per employee from 7.8 per cent this year to 8.3 per cent by 2002. The public finances "are in excellent shape", with the forecast for the general Government surplus in 2000 revised up from 1.7 per cent in spring to 4.2 per cent of GDP now.

But for the first time in a decade Ireland is expected to record a negative current account balance this year and for the next two. A strong surplus in trade is not sufficient to counterbalance net outflows in the services sector and in profit repatriation.

Growth in the EU as a whole will remain strong at 3.1 per cent (3.2 per cent in the euro zone) and 3 per cent in 2001-2002, although the increase in oil prices will have cut it from the 3.4 per cent expected this year (3.5 per cent in the euro zone). That is also why inflation is likely to run at over 2 per cent this year and next.

The report says the weakness of the euro is also a source of imported inflation "but core inflation remains subdued".

Overall public finances are improving but the Commission warns that governments are using the growth dividend for tax cuts rather than structural reform. However, in 2001 only six countries will record deficits - Greece and Austria of less than 1 per cent of GDP, and Germany, France, Italy and Portugal of between 1 and 1.5 per cent.

The Commission says the effects of the oil price rises are likely to be less dramatic on the European economy than the oil shocks of the 1970s for three reasons.

Firstly, real oil prices remain at half the level seen at the beginning of the 1980s; secondly, energy savings have reduced dependence; and thirdly, the macroeconomic framework is clearly stability orientated.

The oil rise will shave some 0.3 of a percentage point off growth this year and add 0.7 of a point to inflation.

US growth is expected to slow from 5.1 per cent this year to 3.3 per cent in 2001, while world growth will do likewise, from 4.4 per cent to 4.1 per cent.

Consumer confidence in the EU dipped sharply in September, but October has not seen any further decline. Private consumption is expected to rise by 2.75 per cent in each of the next two years.

The Commission predicts employment growth this year of 1.6 per cent - or 2.6 million new jobs. Growth will continue at a lower level, partly due to the emergence of skills shortages.

Unemployment is expected to have fallen to 13.3 million in 2002 from 16.4 million in 1999.