All the indications are that 2000 saw the peak of the current Irish economic boom. Figures released by the Central Statistics Office yesterday show that all sectors of the economy were very buoyant in the three months to September 2000. Industry, distribution, transport, services and agriculture each recorded double digit growth rates with the economy as a whole growing at a very rapid 11 per cent per annum. The outlook has changed in the meantime, however. The US slowdown is having a larger impact here than many anticipated while the advent of foot and mouth disease appears to have had an almost calamitous effect on excise duties.
It is difficult to calculate the combined impact of these two factors on the outlook for economic growth. The Economic & Social Research Institute (ESRI) has revised down its GNP growth forecasts for 2001 from 6.7 per cent to 6.1 per cent - back to where it had them in June 2000. The Central Bank has said that if not contained, foot and mouth could take about 1 per cent off its 7 per cent prediction for GNP growth. The ESRI's figures also assume that foot and mouth is contained and that the fortunes of the US economy improve again by the end of the year. According to the ESRI, the US downturn is by far the more serious of the two. It is almost inconceivable for example that foot and mouth will be a major drain on the economy through 2002.
There are also a number of factors continuing to boost output in the economy. The European Central Bank may cut interest rates as early as this Wednesday. Lower interest rates would give a boost to consumer sentiment which has turned down probably on the back of job losses in the US multinational sector. Last year's Budget will also continue feeding into the economy over this year.
The ESRI cautioned that the Government now needs to look at far more flexible tax and pay policies. Exchequer surpluses should be kept very high with tax cuts held off until the economy has returned to trend growth of around 5 per cent. It also pointed to unrealistic wage expectations and warned that the Government ran the risk of exacerbating competitive losses by losing control of these. This echoes warnings from the Central Bank a week earlier. The Bank estimated that wage increases will be 10 per cent in 2001 compared with 7.5 per cent in 2000. It warned that the escalation in wages signalled that "expectations are exceeding resources" at a time when economic growth is beginning to slow.
One suggestion contained in the ESRI report is to provide for contingency measures to deal with economic shocks - specifically consideration by the Government of setting up a fund for emergencies. The choice in this context is to set part of the Exchequer surplus aside for a rainy day rather than using it to reduce the national debt. Such a fund would provide the Government with a ready tool to counter unexpected economic shocks without having to resort to old-style borrowing. The central message from both the ESRI and the Central Bank is that a modest slowdown is on the way but that the available current evidence does not point to a recession.