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Report: inflation, worker shortages could hurt economy

February 16, 2011

By Staff Reporter

By Andrew Bushe

DUBLIN — The country’s leading economic think-tank says the "golden age" of Ireland’s economy is set to continue at a slower pace, but it warns of increasing pressures from inflation and labor shortages.

In its latest quarterly report, the Economic and Social Research Institute warns the government about loosening fiscal policy and aggravating labor and housing inflation.

Inflation rose to 6.8 percent in October and the ESRI estimates it will average 5.6 percent for the year as whole.

It has significantly revised upward its estimate for inflation next year, with a forecast of 4.4 percent to reflect projected wage growth of over 10 percent in 2001.

ESRI warns that the Program for Partnership and Fairness is under "real strain," with wages already rising in excess of it’s terms, reflecting the efforts of businesses to attract and retain scarce labor.

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"If it breaks down then there is an imminent threat of a wage spiral," ESRI said. "If this occurs, Ireland would certainly lose some of its share of foreign investment."

The Institute refers to the "golden age" of the economy during the last six years and says the most obvious benefit has been the "dramatic" fall in unemployment.

It estimates the employment rate is now down to 3.7 percent — a 1.5 percent decline in a year and a 7.5 percent fall since 1996.

The report forecasts there will be a 3.3 percent unemployment rate next year — virtually full employment — and warns this will put further capacity constraints on the economy.

The Institution says the supply of Irish emigrants abroad ready and willing to return is falling, as more and more of them have already returned.

While Irish men and women are happy to come back to Ireland, even if the working conditions are not quite as good as those abroad, the same is not true of foreigners.

"For those without Irish connections it will be necessary to pay increasing [premiums] to attract them away from their home labor markets."

The ESRI says GDP for this year will increase by 9.9 percent and it expects growth to moderate to a 7.3 percent GDP increase in 2001.

The report also expresses concern about personal borrowing, with the ratio of debt to income rising from 43 percent in 1990 to over 64 percent last year.

Within that borrowing increase, the proportion of housing finance loaned has risen by 20 percentage points in the same period to 49.

ESRI said the fact that housing borrowing had soared indicated the extent to which the economy is "exposed to a shock affecting the housing market such as a sharp upturn in interest rates or an employment shock."

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