New figures showing a surge in economic growth have increased fears that the economy is overheating. The economy was growing at more than 11 per cent late last year, more than four times the European average.
The unexpectedly high rate of growth is likely to exacerbate concerns in Brussels over the Government's handling of the economy, amid fears that it is heading for a hard landing.
Mr Pedro Solbes, the Economic Affairs Commissioner, yesterday published a report on fiscal consolidation in Europe which suggested that tax cuts here should have been deferred to take the heat out the economy.
Gross Domestic Product - the value in pound terms of all the goods and services produced - grew by 11 per cent in the third quarter last year, according to the figures released by the Central Statistic Office yesterday. Record new car sales and other anecdotal evidence all indicates that the economy has continued to grow equally strongly this year, while the European economy is growing at only 2.3 per cent.
Economists warned yesterday that if these levels of growth continue they will put an intolerable strain on the economy, which is experiencing a labour shortage.
The European Commission last week urged the Government to act to control inflation. To date the Government has resisted pressure from Brussels, saying that the Commission is failing to take into account the unique nature of the economy, with its young population and high levels of foreign investment.
In a report published in Brussels yesterday the Commission acknowledged "that the monetary conditions applying in the euro area are probably inappropriate for an economy so advanced in the cycle as Ireland".
The report called on the Government to use fiscal policy to try to slow growth. It said the tax cuts in last December's Budget should have been postponed.
Strong spending by consumers and new investment by industry were the main factors fuelling growth last year. Consumer spending rose by more than 9 per cent in the 12 months to April and it has shown little sign of abating. Retail spending is up more than 14 per cent this year. Investment by industry in new factories and machinery grew by 25 per cent in the third quarter last year, reflecting the strong demand for Irish goods and services both at home and abroad. Much of the increased investment was by foreign multinationals in hightech markets, according to Dr Dan McLaughlin, economist with ABN Amro bank in Dublin.
The booming economy is now in danger of running out of workers, he said.
Mr John Beggs, the chief economist with AIB, warned yesterday that long-term damage will be done to the economy unless some action is taken to cool it down. "It is like a car that needs a service but whose owner keeps driving it for another 1,000 miles," he said.
The Government's problem is that it has only a limited number of financial tools at its disposal. Joining the single European currency last year meant ceding control of both interest rates and the exchange rates to the European Central Bank. The Government's only weapon would be a fiscal tightening - meaning higher taxes - according to Mr Beggs.