The Irish economy will continue to expand over the next three years but the pace of growth will be substantially slower. The Government has forecast that Gross Domestic Product (GDP) will increase at an annual rate of 6 per cent over the next three years, compared with growth of 9.5 per cent this year. Outlining its medium-term budgetary objectives yesterday the Government states the slowdown in the economy will be primarily driven by a decline in the contribution of net exports to growth, particularly in 1999, and somewhat slower growth in domestic demand in 2000 and 2001.
The forecasts are made in the Government's Stability Programme which outlines its Budgetary objectives and projections and the main assumptions about future economic developments between 1999 to 2001. It will be submitted to the European Commission.
Over the three years, the Government is aiming to run an average general Government surplus of 1.6 per cent of GDP which will ensure it can meet the medium-term objective of the Stability and Growth Pact to keep Budget positions close to balance or in surplus in normal economic circumstances.
Despite strong economic growth for the last number of years, inflation has remained moderate in the Irish economy, averaging at around 2 per cent between 1994 and 1997.
This has increased to 2.5 per cent in 1998, mainly due to the impact of the depreciation of the pound's effective exchange rate in 1997 and this year. The Programme notes the exchange rate has since recovered and inflation is now expected to moderate to an average of 2 per cent in the period between 1999 and 2001.
It does sound a cautionary note on inflation, pointing to emerging pressures in the economy nonetheless. Future wage developments and the need for continuing social partnership to maintain the economy's underlying competitiveness remains a major concern. While the rapid rise in house prices could also fuel inflation, it warns. "In response to these trends, a number of measures were introduced by the Government on foot of a detailed analysis of the housing market. While there was an easing of house price inflation in autumn of 1998, the long-term solution to this problem must be based on a greatly increased supply of housing to bring supply and demand into balance," it states.
The balance of payments surplus is projected to be eliminated over the period of the Stability Programme, reflecting a slower pace of export growth, a reduction in international transfers and the continuation of strong domestic demand growth. "The primary macroeconomic objective of the 1999 Budget and the Stability Programme is the continuation of sustained economic and employment growth supported by social partnership, low inflation and prudent budgetary policies," it states.
Stability-orientated policies will remain a priority for the Government in its attempt to ensure Ireland's successful participation in stage three of EMU and is also critical to a continuation of economic and social progress.
The Government has stressed the need to use the current resources at its disposal in a balanced way. In this context, it will continue with tax reform, while tackling social priorities and addressing infrastructural needs over the next three years. It also intends to prepare the public finances for the longer-term costs of an ageing population in the early decades of the next century.