THERE are few economies where a growth rate of 5 per cent plus might be termed a dramatic slowdown. But such is the case in Ireland, if recent estimates are correct. Davy stockbrokers this week calculated that the economy grew by a whopping 10 per cent last year, while the Economic and Social Research Institute reckons growth was over 9 per cent.
Forecasts of 5 to 6 per cent growth in Gross National Product growth this year and next look puny by comparison. Of course they are not.
If the economy could sustain growth of around 5 per cent over the next few years, it would still represent a very strong performance, well ahead of the expected EU or OECD average. The question is can it. Has the economy moved on to a new performance level, or are we destined to slip back down the international growth league after a few strong years? Looking at recent economic performance, the encouraging thing is that there is no sign of the typical boom and bust cycle taking hold.
Typically, strong growth fuels inflation and the Government of the day has to step in and increase interest rates, which also slows the economy down. The most dramatic recent example was the boom of the late 1980s in Britain, which was paid for by a deep recession. But this time there are few signs of inflationary pressure either internationally or in Ireland.
That said, growth rates in the 9 to per cent league are clearly exceptional and could never be sustained. As the Davy review points out, the economy has had just about everything going for it over the past couple of years. There has been a boom in vestment, much of it a result of catching up after high interest rates hit investment during the currency crisis.
The international economic upswing of 1994/95 has boosted demand for exports, while rapid inward investment has boosted output from high growth sectors such as electronics. Finally, successive Budgets have injected cash into the economy, while low interest rates have also boosted activity.
Forecasters expect slower growth this year and moving into 1997, due to less buoyant overseas markets, sluggish investment growth and a fall off in agricultural exports due to the BSE crisis. Davy expects GNP to grow by 5.8 per cent this year, but expects a rise of less than 4 per cent next year. Unless one believes that cyclical expansions should last indefinitely, this should not be regarded as surprising and disappointing," the brokers said.
Davy is clearly correct that much of the expansion has been due to the economy being at the top of the growth cycle. What is difficult is judging just how much of the recent growth can be attributed to cyclical factors and how much to fundamental improvements in economic productivity? There are some positive signs. One is that growth is now broadly based. For much of the 1980s growth was driven almost exclusively by multinational exports now the domestic economy is also growing strongly and, even if investment growth slows, consumer spending looks set to remain buoyant. A spin off from this more broadly based growth is that economic growth is paying a higher dividend in terms of new jobs. The moderate rate of inflation is also encouraging.
The outlook internationally is also reasonable. The British economy is chugging along at a solid rate and Irish prospects for next year would get a boost if continental EU markets were to pick up, as some believe they will. On the negative side, interest rates internationally are likely to start heading higher late this year and moving into 1997.
Overall the mid-year report for the economy is reasonably upbeat. The record growth of last year has spilled over into 1996 and all the signs are that employment is continuing to grow. But even if the economy continues to perform exceptionally, we will have to satisfy ourselves with somewhat slower growth over the next couple of years, meaning tougher decisions about dividing up the economic cake. One year of double digit growth feels good, but maintaining expansion at 5 per cent plus a year is still a tough target.
