Economic growth rate of 9% expected to continue next year

Economic growth will continue at almost 9 per cent next year, according to Davy Stockbrokers. Writing in the annual Irish Economic Report, its chief economist, Mr Jim O'Leary, said he is expecting Gross Domestic Product to rise by over 10 per cent this year with Gross National Product rising by just under 9 per cent.

In addition, exports, investment and consumer spending next year will be stronger than previously thought and the prospect of a sharp fall in interest rates, as well as a boost to disposable incomes from the recent Budget, will fuel another big rise in personal consumption.

These estimates imply a 36 per cent cumulative rise in real GNP from 1994 to 1997, or an average annual increase of 8 per cent. The fastest growth previously achieved over a four-year period was 5.5 per cent from 1967 to 1970, according to Mr O'Leary.

However, inflation may rise, with the weakening of the exchange rate likely to feed through to consumer prices. As a result, the brokerage is predicting consumer price inflation to average 2.7 per cent next year from 1.5 per cent in 1997.

Mr O'Leary is also expecting the substantial rise in employment to continue. After increasing by 186,000, or 16 per cent, in the four years to April 1997, he is expecting a further cumulative rise of 117,000, or 8.7 per cent, in the two years to April 1999. This is consistent with the unemployment rate falling from 10.3 per cent to 8 per cent over the period, the lowest achieved since the late 1970s.

This is the most jobs the economy has ever created and actually exceeds the cumulative rise in employment between 1960 and 1993.

However, Mr O'Leary warns, this tightening of labour market conditions will fuel fears of an acceleration in wage inflation, particularly given mounting evidence of labour shortages.

Despite all this good news, Mr O'Leary says there is evidence of the possible overheating of the economy, which greatly heightens the economy's vulnerability to future shocks.

There is already evidence of accelerating wage inflation, with average private sector wages having risen by as much as 5 per cent. There is also the danger that the pace of growth will outstrip the capacity of the available infrastructure, leading to congestion and ultimately to higher production costs and reduced competitiveness. There is growing evidence of congestion, particularly in relation to Dublin traffic.

A third type of overheating occurs, according to Mr O`Leary, when rapid economic growth creates unrealistic expectation. There is "least some evidence" of a speculative bubble in the housing market.

Mr O'Leary admits that the evidence is as yet far from compelling. "But the problem with speculative bubbles is that the evidence is never compelling until the bubble bursts."

He also warns that the more fiscal or monetary policy is relaxed next year, the greater the vulnerability to a negative shock and the greater the risk that the current boom will give way to a sharp downturn in activity.