ECONOMICS:Negotiations on a new pay deal are expected to commence in earnest during April. Much sabre-rattling can be anticipated from both employers and trade unions in the intervening weeks. It is important, however, that neither side inadvertently trips over the sabres they are rattling during the current phase of phony war.

As both employers and trade unions draw up in line of battle, both must recognise that the economic terrain has changed. For the past decade, the trade union movement has held the high economic ground and thus the stronger bargaining position.

Over the past 10 years, the economy has been fully employed. With the labour market tight, employers bid against each other for scarce workers, driving wages upwards as a result. In the absence of large migratory inflows - which increased the labour supply - Irish wage growth would have gone through the roof. At the same time, corporate profits were plump, fattened up successively by the super-competitiveness of Irish business during the 1990s and the domestic boom of the past five years. Coupled with labour scarcity, this weakened employer resistance to pay demands. Ensuring an uninterrupted flow of goods and services to market took precedence over all else.

The boom also conferred windfall revenue gains on Government. The exchequer was awash with money. The easy availability of this ready cash allowed Government to absorb the cost of public service pay awards, most notably the first benchmarking exercise, without batting an economic eyelid.

Now all has changed. The economy is engaged in a transition from fast to moderate rates of economic growth that will persist for the foreseeable future.

The 2008 Budget forecast that real growth in gross domestic product (GDP) would average 3.5 per cent in the years to 2010. This week, the European Commission said the Government's medium-term forecast "appears to be plausible".

As a result of slower economic growth, the pace of employment expansion will weaken and the numbers out of work will rise. Following estimated employment growth of 68,000 or 3.3 per cent in 2007, the Central Bank is now forecasting that just 16,000 people will be added to the national workforce in 2008.

At the same time, the bank is projecting that involuntary unemployment will increase by 26,000 this year, with the unemployment rate rising from 4.5 per cent to 5.6 per cent of the labour force.

In consequence, the Irish labour market is set to loosen up over the next three years. A loosening labour market undermines the bargaining power of labour.

Moreover, within the public sector, the days of easy money are over. Tax revenue growth is forecast to be fairly flat and the overall government budget has descended into deficit from the healthy surplus it enjoyed as recently as 2006.

This week, the EU Commission fired a shot over the Government's budgetary bows. Beyond 2008, it pointed out, "there is a lack of information about what broad measures will be taken so that current spending growth will be contained below nominal GDP growth, especially as regards the public wage bill and social transfer payments".

The commission concluded that the Government's stated budgetary stance for the years to 2010 "may be insufficient" to meet the medium-term objective of structural budget balance.

Responding to the critique, Minister for Finance Brian Cowen said the 8.2 per cent increase in current public spending enshrined in this year's Budget was but "a staging post on the road to expenditures and revenues growing in line".

With insipid tax revenue growth in prospect, this implies further curtailment of current public spending growth.

In turn, this narrows the scope for substantial increases in public service pay in the years to 2010.

Within the private sector, the growth in the profitability of Irish enterprises is being eroded by the weakening tenor of demand in the home market and the steep deterioration in price competitiveness on foreign markets, much of it induced by a strengthening euro exchange rate.

In current trading circumstances, large pay increases will not only dilute profits, they will cost jobs. Moreover, given the weaker economic outlook, resistance to pay increases among private-sector employers is likely to be much more pronounced than in past pay negotiations.

For these three reasons - a loosening labour market, the emergence of general government deficits and weaker private sector profit growth - the pendulum of bargaining power in the labour market is swinging away from the trade union movement.

This is not to suggest that the trade unions do not have an arguable case for a hike in wages.

Trade unions are in a weaker economic position than they have been for over a decade. If hands are over-played, contracts will not be made. If contracts are not made, the winners will be those who want to see an end to national pay deals and to wider social partnership agreements.

And the losers will be the weak.