The boom, it seems, has run its course and is now well and truly over. In its latest commentary, the ESRI predicts that real GNP growth will fall from 10.4 per cent in 2000 to 2.6 per cent in 2002. After eight years of unprecedented expansion there is to be no soft landing - just a short, sharp, nasty shock.

However, this downturn may not be so alarming as it first appears. In 2000, the "natural" real growth rate in the Republic was estimated at 8 per cent. This is the rate of growth the economy could sustain without accelerating inflation or creating labour market bottlenecks.

Given an actual growth rate of 10.4 per cent, the economy was clearly overheating. One way or another, the economy had to slow down after 2000. If the external environment had not transpired to bring about the adjustment, domestic developments would have done so. So, a certain amount of contraction was desirable.

To further complicate matters, in 2001 the natural real growth rate fell to 5 per cent, due to shortages in the supply of labour. Hence, the forecast growth rate for 2001 of 2.6 per cent is not very far short of the sustainable rate. There will be a "growth recession" next year, but the picture is not all doom and gloom.

In 2002, the Irish economy should still outperform Britain, Germany, France, Italy, USA, Japan, and most of the east European and east Asian countries.

However, the ESRI's growth forecast for 2002 is contingent on a number of assumptions. If these assumptions do not materialise, the outcome could be much worse. In particular, if the US economy does not bounce back in the second half of 2002, if the current uncertainty continues to adversely affect investment and consumer confidence, or if the euro appreciates above parity with the dollar, the recession could be deeper than anticipated.

An equally serious problem relates to the Republic's EMU participation. EMU membership has fundamentally changed how a country adjusts out of recession, or to "economic shocks". It has shifted the burden of adjustment away from monetary policy to fiscal policy, and on to the labour market.

Unfortunately, Irish fiscal policy (government expenditure and taxation) has in recent years been pro-cyclical. That is, policy has amplified rather than dampened the business cycle.

This is unlikely to change much in the immediate future and, as such, fiscal policy cannot be relied upon to bring about the necessary adjustment.

This means the burden of adjustment now falls on the labour market and, in particular, on wages and inflation. The key variable here is the real wage (nominal wage adjusted for inflation).

There is a particular real wage that is consistent with the economy growing at the natural growth rate. If the economy is in recession, real wages may have to fall to bring about the necessary adjustment.

One difficulty is that nominal wages are inflexible in a downward direction. This means the adjustment has to come about through inflation. If the growth in nominal wages is kept below inflation, real earnings decline and the economy adjusts back to its sustainable growth path.

This is essentially what happened in the Republic in 1994, when an increase in average hourly earnings of 1.7 per cent was offset by inflation of 2.3 per cent, meaning real wages fell by 0.6 per cent. Soon afterwards, the economy took off. Something similar may now be required.

The problem is that, having waited years to share in the country's economic prosperity, the Irish trade union movement will not tolerate any erosion of real earnings. Trade union membership, particularly in the public sector, is anticipating a significant increase in real earnings in the near future.

Under the new "benchmarking process", trade unions representing workers in electricity, road haulage, teachers, nurses and even Aer Lingus have lodged claims for wage increases in excess of 30 per cent.

Already, the ESRI is predicting that non-agricultural wages will rise by 14 per cent in 2001.

While there is some justification for this level of wage demands in the boom of 2000, they are clearly inappropriate in the recession of 2002. The trade union membership, it seems, have missed the prosperity boat.

The nub of the problem, however, is that while EMU membership has shifted the burden of adjustment to the labour market, the labour market itself is behaving as if the economy is still booming.

Clearly, if the current wage demands are conceded and the euro appreciates sharply, the prognosis is for a prolonged and much deeper recession than currently anticipated by the ESRI.

Nominal wages, which are governed by the PPF agreement, are too simplistic a target.

A much better indicator is the "cost of producing a unit of output in a common currency". This takes into account all the key variables: nominal wages, foreign and domestic inflation, the euro exchange rate and productivity. Economic policy should attempt to ensure there is no deterioration in this index until the recovery is well under way.

Dr Anthony Leddin is a senior lecturer at the University of Limerick