ROAR OF THE CELTIC TIGER

For many, these are she best of times in Ireland. Demand in the shops, even for the most expensive items, has never been so good. House prices are surging ahead. Ireland, for so long in the economic second division, now stands as a role model for the rest of Europe. In the first of a four part series, Cliff Taylor, Finance Editor, reports on the making of an economic boom

By CLIFF TAYLOR

Finance Editor

1. Boomtown Ireland

IT is easy to be sceptical about claims from Government ministers that Ireland is "the best performing economy in Europe". After all, living standards here still lag behind the big EU economies, unemployment is high and most of those in the PAYE net are still struggling to make ends meet. But even allowing for this, the performance of the economy over the past few years has been nothing short of remarkable.

Ireland may not be the strongest economy in Europe but over the past few years it has been the fastest growing. By a distance.

The transformation in the economy is all the more remarkable given the years of underperformance in the 1980s. Hit by the double whammy of the Fianna Fail spending spree of the late 1970s and the second oil shock, Ireland was, in the words of a recent review, "condemned to the economic dark ages" for most of the 1980s.

Over the past couple of years, in contrast, the Irish economy has grown by an extraordinary 6 to 8 per cent a year, while the rest of Europe has been struggling to record growth rates of 2 per cent. At home there may still be scepticism, but overseas analysts have compared Ireland to the Tiger economies of East Asia and dubbed the economy "the Celtic Tiger".

Among the host of statistics that could be quoted to highlight the recent strong performance of the economy, a couple are important:

. Since 1990 the number of people at work has surged by an average of 20,000 a year. Between 1980 and 1987 job numbers were declining by no less than 10,000 a year on average.

. In the year to last April the number of people at work rose by 52,000, an increase of more than 4 per cent. At a time when employment creation across Europe was flat, this was an extraordinary performance.

Because much of the extra growth in the economy has gone into creating new jobs, rather than giving wage increases to those in work, the increase in disposable incomes has not been as dramatic. With many homeowners burned by the high interest rates evident during the currency crisis of 1992/1993, the "feelgood factor" has been slow to build.

Still, a recent analysis by Dermot O'Brien of NCB Stockbrokers shows that the combination of wage increases and tax reductions in recent years has left most wage earners better off under the three national programmes since 1987. With inflation remaining low, the average earner has benefitted from an average 2 per cent rise ahead of inflation in take home pay each year. For 1996, the real take home pay of a person on the average industrial wage is about 22 per cent higher than in 1987, while a married couple is 17 per cent better off.

Obviously many have done even better. Investors have gained from strong stockmarket growth, while many more of those running their own businesses have prospered. New high tech industries have created thousands of well paid jobs.

This increase in living standards is finally being reflected clearly in the economy. Car sales are surging, the property market is booming and retail spending is buoyant. Crucially, despite this strong growth, there are as yet no signs that the rate of inflation is picking up. Only last week the Central Bank, while sounding a warning note about house prices, revised down its 1996 inflation forecast to just 2 per cent. It is this unusual combination of strong growth and low inflation which engenders confidence that even though growth rates may slow, the Irish economy can continue to out perform our EU partners over the next couple of years.

2. Out of the darkness

THE roots of the current recovery go back to 1987. It is easy to forget how grim things were back in the 1980s. For seven bad years the economy had stagnated. Tens of thousands of school and university leavers were forced to emigrate to find work. And by 1987 many average earners were actually worse off than they had been at the start of the decade. While growth among our European partners was buoyant, Ireland seemed destined to remain firmly in the economic second division.

The turnaround can be traced back to the change of economic policy in 1987. The improvements in the public finances that followed were a key element in the recovery.

The minority Fianna Fail government which came to power in 1987 inherited the guts of a tough, Fine Gael inspired Budget on which the outgoing coalition had failed to agree. Minister for Finance Ray MacSharry and his government colleagues decided to go for broke. They introduced extra cutbacks n top of those in the Fine Gael package. The gamble was that it would inspire market confidence and allow interest rates to fall. Fortunately, it worked. By the end of the year interest rates had slipped by four percentage points.

Looking back, the rapid turnaround of the economy is striking. Having contracted in 1986 the economy expanded strongly in 1987. And by the end of the year confidence was on the increase as both consumers and business had more money in their pockets.

Other factors also contributed to the quick bounce back of the economy. In the late 1980s a booming British economy provided a vital prop for business, particularly for indigenous companies. Falling international interest rates, with lower government borrowing, allowed Irish borrowing costs to fall sharply. A virtuous circle of falling interest rates, higher growth and improving public finances was quickly created. A new approach to national wage settling through the Programme for National Recovery contributed to boosting competitiveness.

3. Secret of success?

SINCE 1987, the economic formula of successive governments has changed little. True, the cutbacks in spending seen in 1987 and 1988 have not continued, but successive Ministers for Finance have kept borrowing below 3 per cent of national income.

Meanwhile monetary policy has generally been run from Frankfurt rather than Dublin. The Central Bank has hitched a ride on the back of the Bundesbank, hoping that some of its legendary reputation for stability would rub off. It has had some success. The bank had done its best to maintain a stable currency value against the deutschmark bloc and following the German interest rate lead.

The currency crisis upset this policy for a time, but in recent months normal transmission has been resumed. The result is seen in the current low interest rates.

The fruits of "steady as she goes" policy have been a gradual building of business and consumer confidence. While for so long growth had been driven almost entirely by multinational exports, the last few years have seen a buoyant domestic sector. Investment has soared, assisted by the contribution from EU structural funds. This in turn has improved the economy's growth potential by laying the foundation for further expansion.

Strong investment from major multinationals and the resulting exports from fast growing high tech industry have remained central to growth.

There has been much debate in the Irish economics profession about how the transformation was achieved. In many ways it has stood economic theory on its head. After all, traditional economic theory would suggest that sharp cuts in government spending of the kind introduced in 1987-1988 should have sent the economy into reverse, rather than leading to expansion.

However the reasons for Ireland's economic success may not be that complicated. A correction in the public finances meant that the government sector was effectively getting out of the way and leaving room for the private sector. As the government borrowed less money on the markets, interest rates were able to fall - boosting both business and consumers.

Can it continue? There are always uncertainties on the horizon. The BSE crisis is threatening beef - one of our most important sectors. Our major export markets in Europe are struggling to move out of recession. Growth in key high tech sectors such as computers may be slowing. And in a few years time less EU money will be available. Long term unemployment remains a major problem.

But for the moment the Irish economy story is a good one. Ireland is being lauded as an economic model for the rest of Europe. And with confidence high, the outlook appears bright Ireland Inc has never had it so good.