ESRI warns on outlook for Irish inflation

ESRI senior research officer Mr Danny McCoy said that 2004 was likely to be "a lot leaner" than the preceding two years. In general, he said, expectations on economic growth must be tempered.

Domestic inflation is set to remain above the euro-zone average for the next 18 months, according to the latest commentary from the Economic and Social Research Institute (ESRI).

Although it can be expected to decline moderately over the period, inflation will average 4.5 per cent in 2002 and 3.7 per cent next year, the Government-sponsored think-tank says. Inflation was 4.7 per cent in the first half of this year.

The ESRI predicts that growth in the economy will remain above the euro-zone average until the end of next year, forecasting GDP expansion of 3.4 per cent for this year, and 3.7 per cent for 2003.

The forecasts are accompanied by a health warning however, with the institute pointing out that they are based on a "robust recovery" in world trade volumes in the near term. If this recovery does not come to pass, for reasons such as sustained declines in international equity markets, "considerable downsides" could come to bear on the overall forecast, according to an ESRI statement.

The warning comes on the back of the ESRI's expectation of a "gradual, rather than sudden, erosion in Irish competitiveness", spurred by a combination of euro strength and domestic inflation.

Against such a backdrop, the robust income growth seen by Irish workers in 2001 is likely to slow sharply in 2002, the ESRI says. The institute is predicting national income growth of 6.7 per cent this year and 8.5 per cent in 2003, with the numbers again predicated upon an economic recovery.

Unemployment in this scenario will, the ESRI believes, remain relatively steady over the next 18 months, with the average jobless rate for this year coming in at 4.6 per cent and 4.7 per cent in 2003. Labour force growth is also likely to stabilise, with 1.4 per cent expansion for 2002 likely to be retained throughout 2003.

The ESRI's overall forecast assumes that tax revenue and spending growth will be brought "promptly" into line to address deteriorating public finances. Even if acceptable measures are taken, the General Government Balance - the consolidated picture of central and local Government finances - will see a deficit of €947 million, the ESRI says.

This deficit prediction does not take account of the potential costs associated with full implementation of the Benchmarking Report or its knock-on effects, such as the indexing of public-sector pensions to public-sector pay.

Even with such a substantial shortfall on its balance sheet however, the Government should not be tempted to shy away from its investment commitments under the National Development Plan, the institute says.

If necessary, this could be achieved through borrowing, but only for clearly defined investment purposes, the ESRI suggests, cautioning however that such an approach would require "hard choices in other areas in respect of reduced expenditure or increased taxation".