NCB expects Irish economy to slow down

The Irish economy will slow down this year and worries about "overheating" are being exaggerated, according to NCB chief economist, Mr Dermot O'Brien.

In the stockbroker's latest market review, Mr O'Brien also insisted that talk that wage increases represent a threat to inflation or competitiveness is "alarmist". He is also expecting total employment to rise by about 60,000 this year and inflation to run at 1.5 per cent.

The main reason Mr O'Brien is revising down his growth forecasts is on the assumption that exports will perform less well this year than last.

"There is already some sign that exports are flattening out a little. On top of that a lot of last year's strength was due to once off capacity coming on stream in the pharmaceutical sector which is unlikely to be repeated."

As a result, NCB is forecasting growth in Gross Domestic Product of 6.5 per cent this year from 9 per cent in 1998. Nevertheless, it admits that if this estimate changes it is more likely to be revised upwards.

While exports will fall off, according to Mr O'Brien the domestic side of the economy will remain strong with spending rising by about 7.5 per cent this year from 9 per cent a year earlier.

At the same time he is estimating that real disposable income will rise by 7 per cent this year as lower mortgage rates free up cash.

Investment activity should also remain strong in 1999, although it too will slow a little from 1998, according to NCB.

The report also insists that concerns about wage trend impacting on inflation are "mistaken". Currency movements and external inflation are the main influences, it points out.

He also argues that whether or not a given rate of pay increase can be categorised as excessive cannot be determined on the basis of whether earnings are increasing at a faster pace than in former years.

"Essentially real wage growth that does not exceed productivity should not be a threat to profitability."

In the manufacturing sector productivity has averaged 10 per cent a year over the past five years, while for the economy as a whole growth in output per person employed has average almost 4.5 per cent a year.

"These orders of magnitude give a notion of the degree to which pay increases can be accommodated without damaging profitability at an aggregate level," the report states.

However, there are a few exceptions, particularly construction where productivity growth has decelerated sharply to just 1 per cent to 1.5 per cent a year with unit wage cots pushed up to 8 per cent.