There are grounds for guarded optimism about the economic outlook for this year. The economy has survived a difficult period remarkably well, with the jobs market proving particularly resilient. The Exchequer finances are in reasonably good health, debt levels are low and Government spending is back under control after the period of excess in the run up to the last election. Internationally, growth has recovered in recent months and there are signs - albeit still tentative - that this is benefiting the Irish economy. Most forecasters expect a modest pick-up in growth this year, even if the economy will continue to operate somewhere below its full potential.
There is thus a good chance that economic recovery will gain momentum as the year goes on, as exporters benefit from a better global environment. Recent indicators show that export orders have already recovered markedly. Meanwhile IDA Ireland is hopeful that a few significant investment projects are on the horizon. While there was a net loss of jobs in manufacturing last year, the decision of industry leaders such as eBay and Google to locate significant operations here gives some cause for optimism for the future.
There are, of course, reasons for caution and a risk that the recovery may not be as smooth as most forecasters now anticipate. This is because there are still dangers and uncertainties about the international recovery. And because it is not clear how competitive the Irish economy can be in a much more challenging environment in the future.
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The international risks are well-rehearsed . They principally centre on the danger that the recovery will be derailed, with a collapse of the US dollar the most likely catalyst. The US currency made heavy losses last year, mainly due to nervousness about the huge deficit on the current account of the US balance of payments. Any further decline this year would put pressure on exporters in Europe - and elsewhere - and could threaten recovery outside the US. A sustained US recovery may lessen nervousness about the dollar and lend it some badly needed support. Much will also depend on political events in the US, with the presidential election in November and continued tension in areas of trade policy.
While the US is already growing at a healthy rate, the same cannot be said for the other main economies. There are some signs of a pick-up in the euro zone, but so far they are fairly tentative. EU growth is likely to pick up next year, but the extent of the recovery remains unclear. Against this backdrop, it is important that the European Central Bank stands ready to cut interest rates again, if a further decline of the US dollar poses a significant threat to the growth outlook. It had appeared that EU interest rates had reached their floor, but given the tentative state of the recovery, another cut may be justified early this year.
Elsewhere the main EU economies are faced with having to pursue politically difficult reform agendas, while the future of the Stability and Growth Pact - the rules governing budget policy in the euro area - remains in doubt.
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For the Irish economy, the context is thus a recovering international economy, albeit with some risks and difficulties. There are signals that improving overseas markets are already starting to benefit our economy. Growth has recovered, the live register has fallen in recent months and confidence indicators for business and consumers have improved. Provided the international recovery is sustained, the economy should continue to recover through 2004 and forecasters believe that by 2005 the economy could be back to its potential growth rate of 4 - 5 per cent.
The economy has survived the international slowdown remarkably well and so it should benefit as conditions improve. But some questions remain, mainly about the competitiveness. Inflation here has been above the EU average for some years now and recent estimates indicate that Ireland has joined Finland at the top of the European cost-of-living league. Ireland is an increasingly expensive place to do business and our competitiveness is also hindered by the poor state of our infrastructure.
These factors are put into sharp focus by the expansion of the EU this year, which will greatly increase the competition for mobile investment projects and by the increasing share of foreign direct investment being won by economies such as China and India. The question for Ireland is how to position ourselves in this rapidly changing global economy.
Progress has been made. The rate of inflation is falling, there are signs of acceleration in the programme of infrastructure building and extra funding is being provided for research and development activities and for funding top level science programmes. However it is not yet clear that the Government and its agencies are working to one common agenda and with a clear and determined focus. Progress from now on will be hard won and will require action across a range of policy areas as diverse as competition policy, the efficient delivery of public services and the management of major investment programmes.
Ireland has had a remarkable period of economic success. However we face a formidable challenge in holding on to - and building on - the successes of the Tiger era and implementing policies which will continue to allow the economy to outperform.