Growth will fall back significantly this year, according to the latest quarterly commentary from the Economic and Social Research Institute (ESRI). It warns that the Government will have to adjust its policies to ensure it has the flexibility to deal with the "inevitable setbacks" this entails.
GNP growth in 2000 will have reached a record 9.8 per cent before falling back to 6.1 per cent in 2001 and 5.2 per cent in 2002 on the back of uncertainties emerging from the US slowdown and foot-and-mouth disease.
The 2001 figure has been revised down by the ESRI since January due to these factors, but only by 0.5 per cent because of the very strong stimulus of the Budget, which is boosting the economy by a similar amount.
The ESRI's relatively benign scenario, which amounts to the much hoped for "soft landing", is based on a recovery in the US at the end of the year and some containment of foot-and-mouth.
In terms of GDP, the ESRI is predicting growth of 6.7 per cent in 2001 from 10.5 per cent this year.
The worst case scenario, according to the ESRI, would be growth of around 3 per cent if the US market failed to recover at all. However, it says the Government would still have enough money to cut taxes and boost spending, fuelling a return to normal growth levels a year later, quarterly editor Mr Danny McCoy said.
The ESRI's forecast is in line with some in the private sector. However, it is more pessimistic than the Central Bank, which last week said GNP would grow by 7 per cent this year.
Dr Dan McLaughlin, chief economist at Bank of Ireland, is even more optimistic, predicting growth in GNP of 8 per cent or 8.5 per cent in GDP on the back of continuing export strength.
The biggest danger, according to Mr McCoy, is large rises in wages due to a combination of the Programme for Prosperity and Fairness, the Budget and over-stimulatory fiscal policy. He said the Government ran the risk of exacerbating competitive losses by losing control of wage expectations.
He insisted there was a need to make provision for contingency measures to deal with economic shocks. Mr McCoy said the Government should consider setting up a fund for emergencies.
According to Mr McCoy, the share of the national income accounted for by wages is increasing following sustained decline. The combination of tax cuts and public-sector employment will add about three percentage points to wage rates this year.
As a result, hourly earnings will rise by 11 per cent this year and 9.8 per cent in 2002. However, agricultural incomes will decline by around 10 per cent in response to the foot-and-mouth crisis, but will see a strong rebound in 2002.
The ESRI is also predicting a sharp slowdown in employment growth and a stabilisation of the unemployment rate at just above 3 per cent.
It forecasts inflation will fall back in 2001 to 4.2 per cent from an average of 5.6 per cent last year, as external pressures turn more benign. However, it is still warning that domestic price pressures are rising, reflecting higher wage growth.
The full text of the ESRI's Quarterly Commentary is available from The Irish Times website, www.ireland.com