ECONOMICS: If the economy is going to record any respectable growth over the next year then the consumer will have to hang in there, writes Cliff Taylor, Economics Editor

Walking down Grafton Street this week I bumped into one of Dublin's more bullish economists. With a wave of his hand to point out the hordes of shoppers he exclaimed: "Recession - what recession?"

And you had to admit he had a point. The street was thronged and the shops were busy. It will be some months before we have statistics on how retail spending performed at Christmas 2002. It is unlikely to match the mattress money madness of last year, but the signs so far are that spending is holding up well.

For the sake of our economic prospects, we must hope that it continues to do so. If the economy is going to record any kind of respectable growth over the next year, then the consumer will have to hang in there. At this stage the jury is out on whether this will happen, with the Budget and rising inflation reducing spending power, and unemployment edging steadily higher.

There are four main drivers of economic growth - consumer spending, government spending, investment and exports. The outlook for two of these looks decidedly shaky.

First, the Government sector has strongly supported growth this year, through higher spending and rising employment. In its forecasts accompanying the Budget, the Department of Finance estimates that Government consumption spending rose by 8.9 per cent last year, but will ease back by 0.7 per cent next year. Not much impetus to growth from the public sector, then, which has been single-handedly supporting the jobs market over much of this year.

The second sector which is unlikely to contribute much to growth next year is investment spending. This counts investment by both the public and private sectors. It eased by 0.3 per cent this year, the Department estimates, and is predicted to fall by 0.7 per cent next year, affected by falling Government spending in this area and a nervous climate for private business.

So for growth next year we will be left to rely on the consumer and on exporting industry. The Department predicts that exports could rise by 5 per cent next year, taking advantage of a gradual recovery in the international economy.

Can we can rely on the recovery? Here there are worrying signs. The World Bank in its latest forecast this week wrote that "the global recovery is fragile". A tentative recovery in early 2002 has more or less fizzled out, due to turbulence in financial markets and falling investment. The bank expects world GDP to rise by 2.5 per cent next year, after 1.7 per cent this year. However it warns that any further financial turbulence - or a temporary surge in oil prices due to war in Iraq - could easily reduce this to below 2 per cent.

Looking at individual economies, Germany is in dreadful trouble and threatens to act as a brake on the big Continental euro zone bloc. Britain, still our biggest single market, is somewhat healthier, while the outlook in the US remains uncertain, with confidence severely hit by financial turbulence. Overall, our exporters face an uncertain and difficult outlook for 2003.

It is also important to remember that Irish export figures have been affected by export surges in areas such as pharmaceuticals. These relate to the activities of multinationals here - and obviously benefit the economy through increased employment in particular.

However, they have less of an economic impact than exports from the indigenous sector. Here the British market's health and the euro's health will be key factors. Any sharp rise in the euro's value could provide another burden to a sector already suffering from the increasing costs of doing business in Ireland.

Which brings us back to the consumer. Here the Department is predicting a gradual pick-up from spending growth of 2.8 per cent last year to 2.9 per cent next year and 3.6 per cent in 2004. Whether this is correct will depend on that most brittle and unpredictable of factors - consumer confidence.

We have just gone through a few boom years for the consumer. In the four years 1998-2001 consumer spending growth averaged about 9 per cent a year, driven by rising employment and sharp increases in disposable income. However next year employment growth will be modest at best and, in a Budget analysis, Goodbody Stockbrokers predictd that real (that is inflation adjusted) personal disposable income will rise by just 1.4 per cent next year, down from almost 4 per cent this year.

So the boost to consumer spending from rising incomes will be much less marked than it has been in recent years. Just as important will be the "mood music" for consumers - they have seen a tough but by no means savage Budget. Could confidence be affected by war in Iraq? Or by some more bad news on the employment front?

At the moment there is no reason to expect a collapse in consumer spending. It may well keep ticking upwards, supported by the strong gains of recent years, low interest rates and an international upturn in the latter part of the year.

But it is clear the economy is entering a risky period. Growth has slowed very sharply over the past year or so and there are points of vulnerability in the economy - such as significant numbers of people who have borrowed very heavily to buy property. Statistically the first few months of 2003 may not measure as a recession - but it isn't going to seem too pretty to a populace accustomed to rapid growth.