The Irish economy is showing all the signs of overheating and a dangerous inflationary situation now looms, a conference in Kerry has been told. Mr Brian Patterson, chief executive of Waterford Wedgwood UK, said the classic signs of overheating are appearing.

These include emerging skills shortages, dramatic property price increases and "overcooked" equity prices, he said. A combination of the strength of sterling against the pound, tax cuts and the fact that interest rates must come down before EMU would fuel inflation, he added.

Mr Patterson called on the Government to keep tighter control on public spending and also warned Irish businesses trading in Britain to benchmark themselves against sterling at parity. With the pound rate at 83p-84p, many businesses were sitting pretty, but sterling would eventually fall in value.

Mr Patterson, who was addressing the Irish Management Institute's (IMI) annual conference in Killarney, said he did not want to be a prophet of doom, but other organisations, such as the OECD had also warned of the economy overheating.

On skills shortages, Mr Patterson said Ireland must do a better job at forecasting and providing the right mix of skills.

"Otherwise, skills shortages will not only fuel inflation, but will be a brake on our progress," he said.

He said public spending was still rising year on year but, as a percentage of GDP, was falling, but only because GDP was rising so fast. He said public spending must be carefully controlled.

Mr Patterson told delegates that businesses must find a way of trading straight wage increases "which add to your fixed costs", for realistic and adventurous profit sharing and equity participation.

He said this would ensure the cost base became more flexible and employees felt an increasing sense of partnership within the company.

"That way, whether or not national partnership does come under strain, you have a partnership where it really counts - at the level of your enterprise," he said.

He urged companies to inform all employees regularly of their competitive situation and to do it face to face, even if their companies are large.

"The day might come when you will need them to understand those facts and you need to build credibility now, not then."

Mr Patterson urged the Government to think hard before implementing the recommendations of the Commission on minimum wages.

"We can all sign on for measures to reduce the poverty trap but at £4.40 per hour we would be nearly 25 per cent higher than the US and at the very top of the European league - along with high unemployment countries like Belgium and France," he said.

Mr Patterson said he realised the Government was committed in its election manifesto to implement a minimum wage. Speaking personally, he said, the £4.40 level was too high.

"Tony Blair has the right idea, no tax on incomes below £200 per week."

He also called on the Government to bring State companies fully into the enterprise sector. He said the ESB should be allowed to bargain at prices below its published tariff.

Also the powers of the telecoms regulator should be strengthened to increase competition.

He also said the derogation on full competition on voice telephony, which Telecom Eireann has until 2000, should be ended immediately.

"Derogation is a sign of weakness, that weakness imposes costs on enterprises exposed to stiff international competition," he said.

He added that corporate governance of State enterprises "needs to be cleaned up." And the performance requirements and remuneration of top management in the public sector should mirror best practice in the market.

Mr Patterson also said domestic enterprises, and particularly the small and medium business sector, are under-capitalised and have had a below-average output and employment performance in recent years. "This must be an area of priority if we are not to remain dependent on foreign investment - which will become more difficult to win as eastern Europe and the emerging Asian economies open up," he said.