The Central Bank has renewed warnings about the economy's declining competitiveness and has called on the Government to tackle the high cost of living and rising inflation.
The warning, contained the bank's latest quarterly bulletin, comes as Proctor & Gamble, the owner of Ariel, Gillette, Pampers and other leading consumer brands, announced its first wholesale price increase in five years and one day after US electronics giant Motorola announced the possible loss of 350 jobs in Cork due to increased pressure from low-cost competition.
In its latest review of the economy, the Central Bank states that the cost of living in Ireland is already "the highest in Europe" and says that action is needed to prevent further increases in inflation.
From a rate of 4 per cent last year, it forecasts annual inflation to rise to 4.5 per cent this year - the highest rate in five years.
Minister for Finance Brian Cowen in Brussels dismissed fears of rising inflation and a loss of competitiveness that could cause further company closures.
Mr Cowen said that he was committed to seeing inflation moderating in the second half of the year and underlined that factors outside of the Government's control had caused the increase in inflation.
"We are not responsible for the price of Brent crude or the gas price, these are regulated parts of the economy," Mr Cowen said at a meeting of finance ministers in Brussels. He said that the job losses at Motorola were not an example of a loss of competitiveness in Ireland, but rather as a result of Motorola facing up to international competition.
Despite its warning on inflation, the bank is optimistic on the economy in the near term and predicts that gross domestic product (GDP) - a measure of the economy's annual output of goods and services - will accelerate slightly to 5.5 per cent this year.
However, growth remains over-reliant on domestic demand to the detriment of the economy's external competitiveness, the bank warns.
While this year's SSIAs will boost growth in consumption, it predicts that Ireland's falling competitiveness will cause export growth to continue to slow.
While the expected slowdown is expected to be modest, senior bank sources said that a more severe downturn could not be ruled out.
"We don't expect it to be too dramatic, to somewhere in the region of 4 to 4.5 per cent next year," Maurice McGuire, head of the bank's economic analysis department, said yesterday.
Tom O'Connell, assistant director general, said: "There's a risk of a depression which would bear down on us disproportionately given our trading position with the US."
Despite a "fairly positive" growth outlook in the near term, Mr O'Connell said that inflationary pressures were a growing concern for the economy.
"We're starting from a place where the price level is the highest in Europe. We wouldn't want to exacerbate that," Mr O'Connell said.
Inflation rose to 4.9 per cent in December.
