Reports of the Irish economy's demise have been much exaggerated. While the pace of growth is decelerating, the economy is not stalling. Indeed, the available evidence suggests that the slowdown will be mild.
Misinterpretation of the economy's current performance stems from three sources. First, there is a perception that a slowing rate of growth in some sense signals economic failure. This view fails to recognise that the economy's rate of expansion attained a cyclical peak in 2006. National accounts data published recently by the Central Statistics Office show real Gross National Product (GNP) increased by 6.5 per cent and real Gross Domestic Product (GDP) advanced by 5.7 per cent last year. It is arithmetically impossible for the rate of economic growth to peak every year.
Second, there is a failure to realise that the economy needs a cooling off period after its recent growth spurt. Growth rates of the magnitudes attained over the past two years exceed the economy's medium-term potential for expansion. Where the economy attempts to sustain an expansion path above its underlying rate of capacity growth, it will pay a forfeit. That forfeit is called inflation. As figures published yesterday indicate, Ireland's annual rate of consumer price inflation has been running at five per cent in the first half of 2007.
Third, and most importantly, there is insufficient recognition that Ireland's growth prospects remain bright. Authoritative analyses published in recent weeks by the Central Bank and the Economic & Social Research Institute (ESRI) point to a growth rate in the region of five per cent this year followed by an expansion rate in the range 3.7 per cent to four per cent in 2008. Most industrial economies would give their eye teeth for growth on this scale.
While the economy will continue to move forward in the medium term, this should not be allowed to obscure the very real difficulties that have emerged in some areas. Economic growth is not an end in itself. It is only useful where it enhances the material wellbeing of the citizenry. Many household budgets have been placed under strain this year by increased mortgage interest costs, rising prices for energy-related products and the increasing cost of services, public and private. As a first step, the Government should move quickly to ease these strains by raising the thresholds for tax relief on mortgage interest. Not only would such a move allow more households to share in the fruits of continuing economic growth, but it would act to obviate pressures that will otherwise crystallise in demands for higher wages.
On a more general level, all those engaged in the productive sector of the economy - Government, employers and trade unions alike - must focus with more concentration on accelerating the rate of productivity growth. By doing so, workers will benefit from higher real wages; employers will gain from enhanced profitability; the Government will raise additional tax revenues; and the economy will score by improving its competitiveness.