OECD says rapid growth of economy should continue

THE Irish economy should continue to expand rapidly over the next two years, though the pace of growth will be slower than over the past three years, according to the Organisation for Economic Cooperation and Development.

Growth in exports and in the profits of multinational companies will underpin continuing rapid economic growth, the Paris based organisation forecasts.

In its survey on Ireland, the OECD forecasts an increase in gross national product (GNP) of 6 percent this year followed by 6.3 per cent in 1998. This follows estimated growth of 6.3 per cent last year and 7.5 per cent in 1995.

The latest forecasts are the most optimistic yet. They compare with forecasts from the Department of Finance of 4.75 per cent growth each year for the next three years and from the Economic and Social Research Institute of 5.5 per cent per annum until the turn of the century.

Domestic demand should continue to increase, boosted by rising employment, cuts in income tax and some increases in real wages, particularly in the public sector. Consumption is expected to rise by 9.5 per cent over the two year period, while inflation (measured by the private consumption deflator - a slightly different measure than the consumer price index) should rise to only 2.5 per cent in 1998.

The projections are based on constant pound exchange rates from March 1997 of 2.66 against the deutschmark and 96.8p sterling and an increase in export market growth from 6.5 per cent in 1996 to 7.25 per cent in 1997 and 7.75 per cent in 1998.

Other assumptions are an 8 per cent fall in oil prices in 1997, followed by a further 4 per cent fall in 1998 and a drop in short term interest rates to 5.3 per cent in the second half of 1997 and 4.9 per cent in 1998.

In the medium term, economic growth will depend on "supply side" factors such as the labour supply and the inflow of foreign investment. GNP growth of between 5.5 per cent and 6 per cent up to the year 2002 is forecast, helped by the expected rapid expansion of the labour force through the ending of net outward migration and increased participation by women.

Inflation should remain under control and unemployment should fall, the OECD forecasts.

Rapid convergence of income levels in Ireland and those in the rest of Europe is expected, with GNP per capita reaching 95 per cent of the average EU level by 2002, up from 75 per cent in 1994.

But the report outlines some risks for the economy associated with rapid growth. In the short term, the main risk is higher than expected inflation because "the economy is currently operating close to potential".

Inflationary pressures on costs, notably wages, in the non tradable area could spill over in the traded sector, it warns. This would reduce profitability, weakening the incentive for foreign companies to invest in Ireland and reducing the pace of output growth, it points out.

Some strains are already emerging in the residential real estate market which could spill over into wages in the construction sector.

Monetary authorities should be prepared to err on the side of caution and tighten rates before markets become concerned about possible inflationary tensions, it advises. But the OECD accepts there is a dilemma between dampening inflationary pressure and generating upward pressure on the pound.

Fiscal policy should be used to support monetary policy in keeping inflation low, it suggests. "Fiscal policy in 1998 and 1999 should aim for more demanding targets than those of keeping the budget deficit at the same level as in 1997, as envisaged in the Government's current three year fiscal plan."

Restraining the growth of public expenditure is the key to reducing the deficit, the OECD advises, while an overhaul and integration of the tax and benefit systems "appears necessary to address the causes of Ireland's persistent unemployment problem".