Analysis: A combination of high inflation and low growth is worrying, writes Cliff Taylor, Economics Editor.
For much of the 1990s, economic forecasters spent their time revising up their growth forecasts, as the economy went from strength to strength. Over the five years to 2000, gross national product (GNP) growth averaged almost 9 per cent a year, culminating in extraordinary GNP growth of 10.7 per cent in 2000.
Now, unfortunately, the trend has reversed. The Central Bank and the Economic and Social Research Institute (ESRI) have both cut their GNP growth forecasts for next year to 3 per cent - and they warned that even this might prove optimistic if international conditions do not improve.
A striking aspect of the ESRI forecast is the prediction that the unemployment rate could top 5.5 per cent next year. This means unemployment averaging 184,000 people next year, up from 164,000 this year.
The worrying aspect of the forecasts is the combination of low growth and high inflation - the ESRI expects consumer price inflation to average 5.1 per cent next year, while the Central Bank forecasts a 4.25 per cent average.
The economy suffered in the mid-1970s and early 1980s from particularly damaging bouts of "stagflation" - a cycle of stagnant growth and high inflation. It is a particularly damaging disease as high inflation hurts competitiveness and, therefore, the low-growth period can be sustained.
At the moment, the economy could not be described as stagnant - even the modest growth rates being achieved compare well by international standards. But the economists in both the Central Bank and the ESRI express concerns about the impact of relatively high inflation on competitiveness and growth.
The Central Bank warns about the danger of a high inflation rate becoming entrenched in the economy.
It points, as an example, to the 8.8 per cent rise in average industrial earnings per hour in the year to last June.
The weakness of the euro has protected the exporting industry from competitive pressure in recent years but both sets of forecasters warn that a sharp rise in the euro could damage the high labour-intensive indigenous industry next year.
The ESRI also focuses on the consequences of declining competitiveness. It points to recent employment figures, which show that "a strong upward trend in the rate of unemployment in the private sector is emerging".
To date this has been masked by increases in public-sector job numbers. However, with the Government capping public-sector employment, the stage is set for a steady rise in unemployment, it believes.
The two latest forecasts are, if anything , slightly more optimistic than the Department of Finance's Budget day prediction, which was for GNP growth of 2.2 per cent next year.
The difference of less than a percentage point, however, is not particularly significant. What is important is that the main forecasting bodies are all now at one that next year will be the second year of substantially below-par growth.
Just a few months ago, many forecasters had expected a stronger performance next year, with some predicting growth of 4 per cent plus. What has changed in the meantime is clear evidence that a tentative upturn in the international economy in the earlier months of this year quickly fizzled out.
The crisis in US financial markets - and uncertainty over Iraq - continues to constrain investment and growth in the world's biggest economy.
Meanwhile, conditions in Germany, the European Union's biggest economy, have gone from bad to worse.
Most forecasters are hoping for some pick-up in the latter part of 2003.
If this happens, it could provide some light at the end of the tunnel for the Irish economy, which appears to be heading for a difficult few months at the start of next year.
