The cost of doing business in Ireland is slowly eroding the Celtic Tiger boom, it was claimed today.
In its latest quarterly economic bulletin, Friends First said that overall competitiveness in the economy has been reduced during the past five years.
Chief economist Jim Power said a combination of factors, including higher general inflation; strong growth in wages; adverse exchange rate movements; increased congestion and a significant increase in the cost of state services has resulted in a significant increase in the cost of doing business.
"The loss of competitiveness has started to impact on Ireland's export performance, and growth in merchandise exports has slowed down dramatically over the last five years," he said. "This slowdown in export growth marks a major change from the conditions that characterised the Celtic Tiger period.
Friends First predicted in that the first two years of the new Government will be more testing than any time over the past decade. The bank said the sharp slowdown in housing activity will also put pressure on tax revenues and jobs in the economy.
Mr Power said the Government will have to lower costs and improve competitiveness by controlling public spending and public sector pay.
He said inflation is likely to have peaked at 5.1 per cent earlier this year and an overall average rate of 4.7 per cent is expected for 2007.
In 2008, GDP growth is expected to fall back again to 3.8 per cent — the lowest growth rate in 15 years.
As a result, the Government may deliver a more cautious Budget in December than might have been expected.
"All the evidence suggests that Ireland remains vulnerable to a short-term slowdown in the construction industry," said Mr Power. "In 2006, residential housing activity accounted for 64 per cent of total output in the construction sector.
Employment in construction accounts for 13.6 per cent of total employment in Ireland. "Over 93,000 houses were built in 2006, and with completions likely to ease back to 70,000 next year, there will be an obvious knock-on impact on employment.
The Live Register reached 163,400 in June, its highest level in almost three years. Over the past three months, the number of people on the register increased by 5,900, which is the largest jump in four years.