Feelgood factor won't last forever

Ground Floor: My weekends are spent in rather than out these days, but the man and I cut loose last Saturday night, heading southside for the second night in a row in Dublin 4. We were out for drinks and dinner at one of its upmarket hotels, which was buzzing with men wandering around in tuxes and women wearing the GDP of a small nation in terms of dresses and jewellery.

It was all very Celtic Tiger with people downing cocktails at € 12 a pop and ordering multiple bottles of champagne. A small bottle of water from the hotel mini-bar cost € 4.50, which somehow made the cocktails seem like a bargain. I'm too old to embrace the spirit of not caring that a small bottle of water is € 4.50. I just can't laugh it off and say that it doesn't matter once I can afford it.

However, I know I'm the exception and the feelgood factor is still out there shaking its booty every weekend.

The warning articles in the newspapers are still out there too. There's a groundswell of opinion that sooner or later the ECB rate rises will start to hurt all of us who are living the high life on credit - although you wouldn't think it as we continue to spend.

The big four Irish estate agents recorded new home sales worth over €1.57 billion in the first two months of this year and new home prices increased again (albeit by 1 per cent) in January. Estate agents say that there's no let up in property buyers and that demand is continuing to outstrip supply, particularly in the first-time market.

However, there's a huge concern that our wealth creation is focusing too keenly on the construction and financial sectors and that there isn't a broad enough base from which to keep growing.

The other sector where everything in the garden is currently rosy is the services sector. In the economic boom and bust days of the UK in the 1980s and early 1990s there was considerable concern about the fact that construction, finance and services were the major growth industries. Ultimately, borrowing on the premise of increasing house price growth proved disastrous when base rates were hiked up to over 14 per cent and negative equity took hold.

Ireland is not the UK, however, and there are still demographic reasons for strength in the housing market. Nevertheless, we do seem to have the majority of our eggs in one basket. And that basket could be close to tipping over.

The NCB Purchasing Managers Index report on services for February, which came out last Friday, might offer little comfort to people who think our days of buying a couple of properties before quaffing € 12 cocktails are numbered. The data gathered in the report are from the results of questionnaires sent to about 600 private companies. The sectors covered are business services, financial services, technology, media and telecoms (TMT), and transport, travel and tourism.

Yes, they're all service industries. But services do add value to the economy. The main conclusion from the survey is that the service sector continued to record strong activity and growth in new orders, while job creation was higher once again.

The respondents were generally positive about business activity although acknowledging that the rate of growth had eased. The confidence index was higher than January with more than half of the respondents expecting activity would be higher for the year as a whole.

They were positive about the impact of company expansions, increased investment, sales and marketing campaigns and the level of new business generated. The New Business Index was unchanged from the previous month but more than a third of the respondents reported an increased level of new orders from new and existing clients. The sharpest growth was seen in the TMT sector where the rate of expansion is well ahead of the 12-month average.

Employment growth has increased yet again and the pace of employment expansion has now reached a 63-month high. Again the TMT sector led the charge, with its highest recorded rate in over five years. The tourism sector, which had shown a small decline in January, rebounded with its highest recorded increase since December 2000.

The bottom line of this report is that although the overall Business Activity Index has fallen for a third successive month, it has nevertheless shown growth in activity for 33 months in a row. Employment growth in February was at its strongest since 2000.

Is there a downside?

Well, costs are a problem. Average costs increased significantly last month and the rate of cost inflation has picked up again, having eased slightly in January and December. The main reason for these increases are salaries and energy prices. Over a quarter of the respondents reported that they were paying higher prices than in January and that they had to increase salaries to fill job vacancies in addition to retaining existing staff. In this case transport and tourism saw the lowest increases while the other sectors saw sharp rises.

And there's the issue. If employers are continually facing higher costs, they will ultimately be passed on to the consumer. And at some point the consumer will decide that paying the increased mortgage is more important than spending ridiculous sums on bottles of water and designer cocktails. Although that day may be further in the future than the warning articles suggest.