Tapering off in growth rate seen as inevitable

The ESRI's prediction of a sharp slowdown in Irish economic growth this year is in line with many domestic commentators. None foresees anything approaching a recession but rather a slowdown towards sustainable rates of growth. The ESRI now expects growth in Gross Domestic Product of 10.5 per cent for 2000, substantially above the rate of just above 7 per cent it predicted this time last year. That will slow to 6.7 per cent this year and 6.2 per cent in 2002. These are still substantial growth rates in a European or indeed an OECD context.

Interestingly, the ESRI is less optimistic than the Central Bank, which anticipates GDP growth of 7.5 per cent, and Bank of Ireland's Dr Dan McLaughlin, who is going for growth of 8.5 per cent. But it is in line with Mr Colin Hunt of Goodbody Stockbrokers, who is pencilling in growth of 6.2 per cent in 2001, rising to 7.6 per cent in 2002 as the global economy recovers. One of the main differences between the forecasts is export performance. The ESRI assumes exports will grow by 8.6 per cent this year, down from 20 per cent last year. However, Dr McLaughlin still sees export growth of around 14 per cent. What is certain is that, with the US slowdown and the problems of foot-and-mouth, exports will have to fall back to some extent. Quite how far will probably determine the growth rate of the economy this year.

The ESRI argues that flexible policies on tax and spending as well as incomes are now needed. The editor of the quarterly commentary, Mr Danny McCoy, says it is still too early to deliver more large-scale tax cuts. These would simply boost competitiveness losses and put the economy in dangerous territory when the exchange rate moves against us.

Loss of competitiveness is already accelerating, he says. An appreciating currency will bring serious pressures to which rising domestic costs will add. With wages set to rise by 11 per cent this year and almost 10 per cent next year, wages' share of national income is increasing. Mr McCoy recommends a form of cushion or fund to enable the Government to react. In a paper attached to the quarterly commentary, Mr Donal de Buitleir and Mr Dan Thornhill suggest growth-linked wages in the public sector, which would also address this, Mr McCoy said.

He continues to argue for a deferral of further tax cuts which also lead to overheating. The economy is still overheating and is running above its long-term sustainable rate of around 5 per cent, according to Mr McCoy. Until that rate is reached, tax cuts should be deferred.