Quarterly Economic Commentary, July 2001

The Irish economy continued to experience robust growth in the first half of this year despite the uncertainties arising from the foot and mouth outbreak and the negative overhang arising from the slowdown in the major international economies. While there are signs that the economy is reaching an inevitable deceleration in its remarkable growth performance, the rates of output growth forecast for this year and next are still in excess of those that could be considered sustainable in the medium term. Our forecast for output growth in 2001 is 7.0 per cent in real GDP and 6.0 per cent in real GNP terms. The prospects for 2002 are projected to be 6.4 and 5.4 per cent in real GDP and real GNP terms respectively. A gradual decline in the pace of activity is indicated by lower growth in tax revenues and private sector credit along with declines in house building and car sales. The slowdown is most marked in the prospects for employment growth. We forecast that employment growth will fall from 4.7 per cent in 2000 to 3.2 and 1.9 per cent respectively for this year and next. This drop-off in employment growth reflects the near full employment conditions and the decrease in the growth of the labour force. Unemployment is forecast to stabilise around a rate of 3.6 per cent in 2001 and 3.5 per cent in 2002. While output growth is slowing from the exceptionally high levels of 2000, considerable demand pressures remain. These have been boosted by the continued weakness in the euro, low real interest rates, high domestic after-tax income rises and large public expenditure increases. Inflation in consumer prices, while not the most appropriate measure of overheating pressures for a small open economy like Ireland, has nonetheless remained high. The headline inflation rate is expected to average 4.8 per cent in 2001 before moderating to an average of 3.3 per cent in 2002. A further indicator of excess demand pressures in the economy is the re-emergence of a deficit in the current account of the Balance of Payments in 2000 after eight years of surpluses. This deficit is forecast to rise in 2001 and 2002 to 1.1 and 2.0 per cent of GDP respectively. The Irish economy's transition in just under a decade to above average European income levels is nearing completion. At the end of this transition domestic policy tools need to be configured to consolidate the gains achieved and to alleviate the inevitable bottlenecks that emerge in a period of rapid growth. In the current context for Ireland, notwithstanding the slowing of economic growth, restraining domestic demand whilst increasing supply capacity is an imperative. The onus on managing domestic demand falls on budgetary and incomes policy, while more specific sectoral interventions are required to boost the economy's supply capacity. Arriving at a turning point in terms of its economic growth, Ireland is in a rather unique position to reflect on the nature and suitability of the current economic governance within the European Union, especially for economies in transitions. By shifting the emphasis on to the economic rules at work within the EU, Ireland can help provide a useful demonstration for aspirant member countries in the pursuit of successful European enlargement.