By Andrew Bushe
DUBLIN — The most immediate threat to the Irish economy is unjustified expectations about its capacity to absorb price and wage increases without damaging competitiveness, the country’s leading think tank says in its latest report.
The Economic and Social Research Institute has revised its inflation forecast up to an average 5.3 percent for this year.
It expects it will fall to 3.6 percent in 2001 if unions adhere to the terms of the national wage deal, the Program for Prosperity and Fairness.
In July and August, inflation has been running at 6.2 percent and leading unions are looking for extra wage rises of about 5 percent to compensate.
The 33-month-long PPF, signed last March, is to deliver 15.75 percent in pay increases and 10 percent in tax cuts in three phases. Inflation is eroding the benefit of the deal’s first 5.5 percent pay rise.
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"The concern must be that expectations of high inflation, in excess of that justified by economic fundamentals, could lead to excessive price rises and wage demands," the ESRI says in its September quarterly report.
"The ability to control inflation in the short term, both to stem the prospect of self-fulfilling expectations taking hold and to protect real incomes, is limited for a small regional economy like Ireland within a large monetary union."
It says higher pay and lower taxes are expected to increase personal disposable income this year by 11.8 percent and by 10.8 percent in 2001.
The Institute says that the public finances have never been in better shape.
Direct tax receipts will grow nearly 14 percent this year and indirect taxes by 16.1 percent. Total government current revenue will grow by 16.5 percent.
The budget surplus was strongly ahead by mid-year and is expected to rise to 8.4 percent of GNP this year and 9.6 percent next year.
During the Celtic Tiger phase, since 1994, the ESRI says the performance of the economy has been "exceptional." Growth has averaged 8.7 percent in GDP terms and 7.8 percent in GNP terms.
The Institute has revised its GDP growth forecast for this year to 9.6 percent and 8 percent for GNP.
"Growth in 2001 is forecast to slow moderately to 6.9 and 6.1 percent in real GDP and real GNP terms, respectively, due to a combination of factors such as rising interest rates, a modest currency appreciation and a tight labor market contributing to significant wage growth."
Unemployment is currently at 4.3 percent but the ESRI predicts it will drop "well below 4 percent" by the end of next year in a move toward a full-employment economy.