Economy set to grow by 4% this year, says ESRI

The Economic and Social Research Institute (ESRI) has predicted that the economy will grow by 4 per cent this year, and by 4.2 per cent in 2003. The forecasts, which bring the Government-sponsored think tank in at the upper end of economic predictions, are based on a return to strong international growth.

But the ESRI acknowledges that the global economic recovery appears to be "slower and weaker" than initial expectations. Risks that the ESRI says could set this back further include a war in Iraq, new corporate governance scandals and a further downturn in the equity markets. If the growth forecasts come to fruition, they will equate to a "soft landing" for the Republic's economy, the ESRI notes in its latest economic commentary.

In GNP terms, growth is forecast to be 2.5 per cent in 2002 and 3.3 per cent next year.

On the public finances, the commentary argues that the forthcoming Budget will need to bring expenditure under control, while adopting a "minimalist" approach to taxation.

The ESRI is forecasting the general government balance - a measure favoured by economists which includes all arms of Government - to be in deficit by 1 per cent of GDP this year, with this moving up to 1.2 per cent in 2003.

According to the European Commission's definitions, this would push the Republic towards the edge of its "safety margin" on the Stability and Growth Pact. This means the economy could breach the pact if there is a severe downturn.

A more significant threat to the Republic's obligations under the pact could come from benchmarking, says ESRI economist Mr Danny McCoy. He said yesterday that if the 8.9 per cent public-sector pay awards recommended under benchmarking was implemented in full next year, the general government balance could be pushed into a deficit of €4.5 billion, close to the limit of 3 per cent of the GDP permitted under the pact.

If benchmarking is not implemented, the general government deficit will be €1.6 billion next year, the ESRI estimates. The equivalent Exchequer deficit would be €3.7 billion, a significant rise on forecasts for a €1.2 billion Exchequer deficit this year. The Minister for Finance, Mr McCreevy, has previously said this year's Exchequer deficit would be €750 million.

Mr McCoy also warned that "realism" was required from all parties to the forthcoming pay negotiations, since future growth prospects may not be "benign". Concerns were raised about unemployment, which Mr McCoy said was likely to rise as evidence grows that the international recovery will be slow.

He suggests some employers may have been engaged in "labour hoarding" in anticipation of an upturn in growth. This may now unwind, he believes, noting that "the dog that isn't barking at the moment is unemployment".

Unemployment is forecast to rise to 4.8 per cent next year, from 4.5 per cent in 2002. The ESRI expects inflation in consumer prices for this year to average 4.7 per cent this year and 4 per cent next year. So far this year, inflation has averaged at 4.6 per cent.

The ESRI has predicted annual euro-zone growth of 1.1 per cent this year and 2 per cent in 2003, but cautioned that these forecasts could be lower.

The European Commission yesterday left its growth forecasts for the euro zone unchanged for the second half of this year. It predicts expansion of 0.2 to 0.5 per cent for the last two quarters.

The predictions came just before the European Central Bank decided to leave euro-zone interest rates unchanged at 3.25 per cent. The failure to move, which was no surprise to the markets, saw the euro move to its highest level against the dollar since July. ECB president Mr Wim Duisenburg said the decision to leave rates unchanged had been prompted by concerns about inflation. The euro closed at $1.0013.