Soft landing likely says Davy economist

The pace of growth of the Irish economy will slow over the next five years, according to Davy Stockbrokers chief economist Mr…

The pace of growth of the Irish economy will slow over the next five years, according to Davy Stockbrokers chief economist Mr Jim O'Leary.

In a paper given to the Industrial Relations News annual conference, Mr O'Leary said the economy was still likely to be heading for a soft landing, and could not continue to grow at its recent rate.

Growth will be 8 per cent this year, falling to 6.5 per cent next year and around 5.5 per cent from 2003-2005, as labour force growth slows and unemployment falls close to minimum rates.

The biggest risk to this benign scenario is that the State will suffer a sharp downturn in its attractiveness as a business location. However, there are also external risks of an international recession and a shake-out in the computer sector, according to Mr O'Leary.

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"A stage is reached where a location is host to so much economic activity that the costs of congestion start to rise, setting up countervailing forces. In other words success breeds success only up to a point."

The risk for Ireland is that the forces will gather momentum and that Ireland will experience a sudden loss of reputation as a destination for foreign direct investment.

There are few other domestic dangers. Mr O'Leary does not see much risk in accelerating wage rates. Much of the comment about wage-price spirals is caught in a 1980s' time warp, and wage rises this time are the result of labour shortages, he said.

"Wage inflation does not represent a threat, provided it does not drive the wage level beyond the point where labour shortages are eliminated." And that is unlikely in a world where remuneration packages are more flexible and more performance-related than in the past.

He is also fairly sanguine about house price rises. He insists that prices today are more affordable than five or 10 years ago when lower interest rates and higher disposable incomes are taken into account.

"The main problem in the housing market is not price but location. There are plenty of affordable new houses coming on stream but they are not being built in the right places."

However, there are external risks. Chief among these are an international recession, prolonged contraction in the global computer industry or a sharp appreciation of the euro.

A US slowdown will impact on Europe but is unlikely to cause a recession in Europe. "The damage it would do to Ireland's principal export markets and to investment flows into Ireland would be limited."

But if a recession was accompanied by a serious contraction in the computer industry it could be more serious. This would be exacerbated by the shift within the sector away from PCs towards hand-held computing.