The Republic's economic boom is set to continue, with growth this year likely to be higher than originally anticipated, while inflation will be lower, the Department of Finance said yesterday. But the annual Economic Review and Outlook also warns that longer-term growth could be choked by labour shortages, rising prices and infrastructural bottlenecks.
The department will revise upwards the prediction it made last December that gross national product would grow by 6 per cent this year; it now expects a rise of 6.6 per cent. Gross domestic product is set to climb 7.5 per cent this year, the department said, up from the earlier estimate of 6.7 per cent.
The review predicts the number of people working will rise by 60,000, unemployment will fall to 6 per cent from last year's 7.7 per cent and buoyant tax receipts will create a budget surplus of £1.7 billion (€2.16 billion), or 3 per cent of GDP.
Analysts described the department's figures as cautious, predicting that growth would wind up considerably higher still.
"The Department of Finance has replaced one set of conservative figures with another slightly less conservative one," said Mr Jim Power, chief economist at Bank of Ireland. "I am forecasting 9.5 per cent GDP growth." But Mr Eoin Fahy, of Ulster Bank, said that, while the latest numbers were moderate, they were "more realistic" than in previous years.
The review says the economy's "exceptional growth phase" is continuing: "For the sixth successive year economic growth in Ireland will be among the highest in the world. Such a sustained period of very rapid growth has few if any precedents, not just in our own economic history but in that of the industrialised world."
Recent estimates by the OECD and others suggest the Republic's economy has the potential for sustained, medium-term growth of at least 4.5 per cent, the report says, but there is no guarantee this will be achieved.
"For some time now it has been evident that the continuation of rapid economic growth is giving rise to pressures and tensions which have the potential to choke off growth and perhaps to give rise to serious imbalances. These tensions include inflationary pressures, excessively large increases in house prices, labour shortages and the emergence of infrastructural bottlenecks," according to the report.
Citing the relatively low pay increases under the partnership agreements as a key factor in driving recent growth, the report says the labour market has tightened of late, with labour shortages emerging.
"If these were to be reflected in levels of pay increases which would damage competitiveness either directly or indirectly, this could quickly bring an end to the favourable employment and unemployment trends," the document warns.
The department also points to the fact that competitiveness has been assisted in recent months by the strength of sterling and the dollar against the euro, adding that this has tended to counteract the effect of pay increases: "But if these currency movements were to be reversed, the adverse impact on competitiveness could be significant - particularly in more traditional and labour intensive sectors."
The review stresses the importance to the economy of the Government's forthcoming National Development Plan in providing infrastructure, but voices a worry that the sudden increase in public capital spending could lead to overheating in the construction sector.
For the first time, the Department of Finance released the report simultaneously in print form and on the Internet. It can be read at www.irlgov.ie/finance/new.htm.
