EMU will slow growth in GDP

Irish growth is set to slow significantly after we enter the single currency, according to the latest forecast from Standard &…

Irish growth is set to slow significantly after we enter the single currency, according to the latest forecast from Standard & Poor's, the international consultancy.

The economy will grow by 9.8 per cent this year in terms of Gross Domestic Product but this will slow to 6.5 per cent in 1999, Ireland's first year as a member of monetary union, according to the consultancy group.

But even when the pace of growth slows within monetary union, the economy will still be racing ahead of the EU average.

S&P also predicts unemployment will fall below 8 per cent by the year 2000, following strong employment growth.

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Mr Andrew Stockman, Ireland economist at S&P, warned that consumer prices would come under pressure in the middle of this year and the start of next. "The main risk for Ireland is that, being in the EU fast lane means, it may break the inflationary speed limit, so social consensus on wage restraint will be essential to keeping the economy on track."

He added that, if a tight grip was kept on spending, there should be some room for tax cuts for lower earners without jeopardising short-term growth.

According to Ms Elisabeth Waelbroeck-Rocha, chief European economist at Standard & Poor's, the run-up to monetary union at the end of this year will be crucial to avoiding any risk of overheating.

She noted that interest rates would have to fall by 2.5 percentage points and most of these cuts were expected to occur as late as possible. This would avoid short-term inflationary pressure in the economy this year, she added.

Rates are then expected to increase again next year to 6 per cent, as the European Central Bank tightens policy.

S&P is forecasting average inflation this year of 2.9 per cent rising to 3.3 per cent next year before falling back to 2.7 per cent in 2000.

The public finances are also set to improve, according to S&P. It is expecting a surplus of 1 per cent of GDP in 1998 and 1999. And it is expecting public debt to fall to 56 per cent this year and to continue declining to 38.4 per cent before 2005 and to 19.7 per cent by 2010.