The erosion of Ireland's competitiveness is becoming a matter of growing concern as the economy enters a phase of slower growth, the Central Bank warned today in a gloomy assessment of the country's economic prospects.
In its Spring Bulletin published today, the bank warned that rising labour costs in domestic industry without an accompanying rise in productivity was putting strain in what is already a weakening economy.
The bank forecasts that Gross National Product - the most accurate measure of economic growth for Ireland - will be only 1.75 per cent in 2003 compared to an estimate of just under 3 per cent in its previous bulletin. The bank added it has downwardly revised its estimate of the economy's potential growth rate from 5 per cent to 3.5 per cent, signalling an era of slower growth.
Unit wage costs in Ireland are rising at 5.8 per cent annually compared to a euro zone average of only 2.5 per cent while productivity, especially in domestic firms is just over 2 per cent, the bank said.
The bank said this situation is unsustainable given that Ireland's price level is now 12 per cent higher than the euro zone average in absolute terms. Under these circumstances, the gap between Irish inflation and euro zone inflation should be narrowing but there is no evidence of this happening, the bank warned.
The inevitable result of higher wage costs will be rising unemployment and the bank estimates that the jobless figures may reach 6 per cent or higher if the competitiveness issue is not addressed.
Dr Michael Casey of the Central Bank said Ireland had benefited during the boom years but globalisation has turned out to be a "double-edged sword" for Ireland and it was up to Irish policy makers to make the "hard yards to get ourselves out of the downturn."
The bank also voiced its concerns that weakening property prices after the boom may put borrowers and lenders under strain. The bank has commenced on-site inspections of lending procedures in financial institutions having recently sent a letter to all banks and building societies reminding them to keep tight control of lending in the weakening economy.
As job prospects look more fragile Dr Casey advised prospective house buyers to have a good to talk with their bank manager before taking out a mortgage or loan.