Slowdown in pace of growth predicted

A gradual slowdown in the pace of growth rather than an abrupt weakening of the Irish economy is predicted by Davy Stockbrokers in its June economic report.

A deceleration in Gross National Product (GNP) growth from 8.8 per cent in 1998, to 6.8 per cent this year and to 5.5 per cent in 2000 is likely, with the slowdown being evenly distributed across domestic demand and exports, according to Davy chief economist Mr Jim O'Leary. The slowdown in growth will occur as labour market tightness and pressure on infrastructure capacity bites. The authors of the report express the view that "the scale and severity of the infrastructure deficit has yet to be converted to a sense of urgency at the policy-making level."

Vigorous employment growth is to continue, with total employment rising by 100,000 between 1998 and 2000. This will see unemployment falling to an average of 5.3 per cent next year, according to the report.

The report concludes that tax receipts will outstrip the official target by a very large margin again this year, with the economists reckoning on an overshoot in the order of £600 million (€761.84 million). On that basis, they expect the 1999 budget surplus to reach 2.7 per cent of GDP compared with the official target of 1.7 per cent. "Our preliminary assessment of the budgetary situation for 2000 suggests that next year's surplus should be of the same order of magnitude," the report says.

"In addition, privatisation receipts could amount to as much as £4 billion (over 6 per cent of GDP) in 1999 and a further £1 billion plus in 2000. The net result should be a fall in the debt/GDP ratio of about 40 per cent by the end of next year, or 19 points below its end-1998 out-turn." On house prices and the possibility of their collapsing, the report states that prices "seem" to be above the level warranted by the fundamentals, though the margin is small at about 10 per cent and is much smaller than the equivalent margin in the UK in the late 1980s.

Analysis shows that the bulk of the increase in house prices can be explained by fundamental factors such as demography, disposable incomes and interest rates, according to the report. For this reason, it is considered "very unlikely" that house prices will spontaneously collapse.

The current economic boom "contains the seeds of its own demise" in the sense that it has spawned conditions that will cause the growth to slow. It has also made the economy more vulnerable to external shock.