The good times will return despite the economic uncertainty of the next couple of years, Economic & Social Research Institute (ESRI) research professor, John FitzGerald, said yesterday.
Presenting the ESRI's Medium Term Review 2001-2007, he insisted that despite the attacks in the US and the global slowdown over the medium term Irish economic prospects remained good.
Growth may fall to 1.8 per cent next year but it will recover to 4.2 per cent the following year and to 5.1 per cent in 2004, according to the ESRI. Average growth over the period 2000 to 2005 will come in around 4.5 per cent - still far higher than the EU average.
And according to the analysis, growth will remain high over the five years to 2010 when it will average 4.7 per cent. After that, growth will fall back to the EU average as the population ages.
The extent of the slowdown and the timing of the recovery are both dependent on the fate of the US economy and to a large extent on movements in the value of the dollar, according to the ESRI. "We do not see the US recovering until the dollar falls," Prof FitzGerald said. "There is a real possibility that if the dollar does not fall the US recovery will be much slower and the slowdown there could be prolonged to 2004."
The institute predicts that the dollar will depreciate to $1.07 against the euro, although Prof FitzGerald admitted that forecasting currencies was extremely difficult.
This kind of euro appreciation would put substantial downward pressure on inflation as import prices would fall and, according to the ESRI, it could average around 2 per cent in 2002 in Ireland and only 0.9 per cent in the euro zone.
"This would allow the European Central Bank to cut rates substantially and rates could fall below 3 per cent for the course of 2002," Prof FitzGerald said. This would provide a substantial stimulus to the economy and would help ensure recovery was rapid.
However, in the shorter term it would rapidly erode the competitiveness of Irish firms which have been benefiting from the weak euro, probably lead to job losses and would undermine confidence. Exporters to the UK and the US would be particularly hard hit.
Nevertheless in the short term the institute is predicting that wages will continue to rise rapidly - by around 10 per cent this year and 8 per cent next year. After inflation, the real after-tax increases are 5.2 per cent and 5.8 per cent respectively. By 2003 this will have fallen to 3.8 per cent and to 2.7 per cent in 2004, according to the institute's model. As a result income per head will be 107 per cent of the EU average by the middle of the decade but because of the ongoing deficiencies in infrastructure, living standards will not be as high.
Addressing infrastructure deficiencies is crucial, according to Prof FitzGerald and failure to do so would have serious repercussions. He warned that missing the targets in the National Development Plan could knock as much as 1 percentage point off GNP every year for the foreseeable future.
He added that large numbers of cars were still likely to be sold to the growing number of 20-somethings in the State. "Car sales may slow somewhat but congestion on the roads will certainly worsen over the coming years."
More controversially the ESRI has called on the Government to look at increasing corporation tax rates. According to Prof Fitz-Gerald, there is scope to to raise corporation tax without frightening off multinational firms. He called for study to ascertain the exact level but suggested that a pre-announcement of an increase to 17.5 per cent could work.
Selected extracts from the ESRI report are available in full text format on The Irish Times website at: www.ireland.com
