Minister for Enterprise Micheál Martin warned yesterday that excessive wage demands from trade unions in the upcoming partnership talks could damage competitiveness.

At the launch of the Annual Competitiveness Report 2005, Mr Martin said the talks would play a critical role in determining economic progress in the Republic over the next few years.

"The message I would give [ to workers] is that Ireland must look at it collectively . . . There are currently significant global challenges, probably more so than for a number of years," he said.

"The competitiveness agenda must critically inform the substance of the partnership talks," added Mr Martin, who noted that Irish wages are now placed fourth highest among 14 countries surveyed in the report.

He said the report, which was compiled by the National Competitiveness Council (NCC), had pointed out the emerging worry about labour costs. But he said individual firms could do something about this if they put a new emphasis on productivity.

"Companies that achieve higher productivity can beat competitors' costs," he said. "But if our rates of pay are put of kilter with our competitiveness position we have a serious threat to both jobs and living standards."

Mr Martin said he did not believe in driving down wage rates in a high-cost economy, rather, wage moderation was a good approach, while Ireland could reposition itself with the help of new technology, organisational change and innovations.

The Annual Competitiveness Report 2005 also highlighted that price levels in the Republic remain among the highest across all the benchmark countries.

Non-pay-related business costs, particularly energy and waste disposal, were also among the highest of the countries surveyed for these two criteria.

Mr Martin said this reflected that in these two areas the Republic was playing catch-up after years of underinvestment.

The report also highlighted a number of national economic strengths over the past decade that had driven Irish growth.

It said the Republic still ranked first of 16 countries benchmarked in terms of corporation tax and personal taxes. It also has a strong entrepreneurial culture with 193,000 people either actively planning or in the process of setting up businesses.

Ireland also remains one of the most open economies in the world for trade in goods and services, and in direct foreign investment. It continues to enjoy the highest stock of foreign direct investment per capita among the countries surveyed in the report.

Dr Don Thornhill, chairman of the NCC, said the Republic performed remarkably well in comparison with other countries in terms of increasing employment levels and living standards.

However, he highlighted relatively weak performances in some areas required to drive the knowledge economy. These include: low levels of investment in education; relatively low participation rates in life-long learning; lower levels of R&D spend than other states; and low use of patents and technology.

Dr Thornhill also warned that household spending was being supported by record levels of private sector credit. Credit had grown from 78 per cent of GNP in 1997 to 163 per cent of GNP in 2004. This growth was likely to halt sometime in the future.

The report did not offer any policy recommendations for Government.