Unemployment could double by 2003 as the knock-on effects of a slowdown in the US market weigh on growth levels in Ireland. The medium-term outlook looks rosier as the stimulatory impact of interest rate cuts by the US Federal Reserve and the European Central Bank encourages investment down the road.
"In the short term the economy faces a few difficult years and one of the main signs of that will be quite a significant increase in unemployment," Economic and Social Research Institute economist, Mr David Duffy, said.
The economy was approaching full employment last year but this has now changed dramatically. Wage rates are rising much more rapidly than in competitor countries and the resulting loss of competitiveness will restrain future employment growth.
While there are some concerns that too much competitiveness could be lost, the ESRI anticipates that market circumstances will produce a moderation in wage inflation and that the loss of competitiveness in the medium term will not prevent the economy from returning to full employment at a later date.
Medium-term employment growth is expected to average 2 per cent per annum between 2000 and 2005, compared to almost 5 per cent a year between 1995 and 2000. In this slowdown scenario, the ESRI expects 7.6 per cent of the labour force to be without a job in 2003, compared to 3.7 per cent unemployed currently.
The fall in employment will be across all sectors, with the exception of public services. The hardest hit areas will be transport, communications and general services, as uncertainty results in people tightening their belts and reducing discretionary spending.
Although the traditional manufacturing sector has only been a moderate beneficiary of the boom years, it will still see contraction as the economy slows due to lack of competitiveness. The weakening dollar and sterling will make the price of Irish products less attractive.
"The combination of the US slowdown being prolonged well into next year with a serious reduction in the prospective growth rate for Europe would provide a very unfavourable short-term environment for the Irish economy," Mr Duffy said.
"The situation would be further aggravated in the short run as Irish firms lose competitiveness against competitors in the UK and the US."
The US slowdown would also see a very substantial cutback in US foreign direct investment. This would have more of an impact on Ireland than on most other EU members. The loss of competitiveness and the continuation of the slowdown in thin demand in Ireland's key European markets would put all firms in the tradeable sector under pressure.
However, while the short-term view looks poor, the economy remains fundamentally healthy and the ESRI says it has potential to grow at five per cent a year in the medium term. "Any under-performance in the next two years is likely to be matched by a subsequent spurt of activity, returning the economy to its trend growth path," Mr Duffy said. Full employment should gradually be restored as things improve.
In the slowdown scenario, the ESRI expects Gross National Product growth to average around 4.5 per cent per year over the current decade, but in the short term, growth rates could be much lower than in recent years.
