Official figures for 1997 output growth in the State will be released next week. The betting is that GDP will have risen by 10 per cent, and some think the figure could be higher. In the current year, all the indicators are that growth is just as rapid as it was during 1997, so GDP will be up another 10 per cent or thereabouts.
This hectic growth pattern started in the middle of 1993, so we are now five years into an unprecedented expansion. Over this period, total employment has risen by around 20 per cent, or by almost 50,000 jobs per annum.
Any economy which spends five years growing at twice its previous growth rate must eventually begin to hit up against shortages in the supply of labour or of capital. In our case, it seems to be both, and the slowdown cannot be more than a year or two away.
The shortages of labour are beginning to manifest themselves in several ways. Hourly earnings in the construction sector have been rising particularly rapidly, as have rates of pay for less skilled workers in parts of the services sector. Unemployment has fallen sharply, and immigration is again quite substantial. In the 12 months to April 1998, it looks as if immigration will be about 20,000, the biggest movement of people into Ireland for 20 years.
Reservoirs of under-utilised labour which were available in 1993 are beginning to get used up. These include the unemployed, women who were out of the labour force, and returning migrants.
The capital stock comes under pressure too when growth is so rapid. This pressure tends to provoke a quicker response from private investment than it does in the publicly-owned capital stock. The most evident shortages now emerging are in areas like the inter-urban road system, urban public transport systems, and housing, which relies on public infrastructure provision. There are long gestation periods for new investment in these areas, and the response to the output boom has been slow.
The result is traffic congestion and a clearly overheating housing market.
AS labour and public capital become scarcer, the boom must slow down, and a new, lower growth path emerge which is sustainable. There is plenty of room for argument about what kind of growth rate can be sustained in the State. Some think it could be as high as 6 per cent, others no more than the 4 per cent historical average. But I know nobody who believes that it is 10 per cent.
The boom could unravel gently, into a soft landing on a lower growth curve. Or there could be a crash landing into recession.
If we were trying to engineer a soft landing, how would we go about it? If it were accepted, to be more specific, that the growth rate should be reduced to, say 5 per cent over the next couple of years, what is the least painful and least distorting way to bring this about?
In an economy like ours, it seems to me that the best way would be a gentle rise in the exchange rate and a rise in interest rates. The latter is entirely at the discretion of the Government, the former likely to occur spontaneously if the markets were allowed to dictate the value of the Irish pound.
But this approach is ruled out because of our commitment to EMU. We cannot let the exchange rate rise. Moreover, it looks as if interest rates in Ireland are set to fall by about 2 per cent, sometime before January next. At present, Irish short-term rates exceed those in France and Germany by more than this amount. A fall of 2 per cent here could occur even if, as many predict, rates in Europe rise a little as economic recovery in those countries picks up.
The Central Bank has expressed its unhappiness about this prospective fall in interest rates, and it is not difficult to see why. On recent figures, new housing supply in the Dublin area seems to be falling. Demand factors are as strong as ever. A fall in mortgage lending rates in 1999 can only exacerbate the situation.
Ireland is joining EMU without sterling, which was always going to entail serious risks. But it is now clear that the timing is all wrong to boot. The monetary policy and interest rate regime will be dictated by conditions in the major European economies, and our situation is totally out of kilter with theirs. We are about to have a monetary policy designed for economies emerging from recession imposed on a country five years into an unprecedented expansion.
It would be entirely appropriate for the Government to arrange now a deferral of EMU membership for at least two years, in the hope that our position in the economic cycle would be closer to the European mainstream when we do eventually join.
Calls for a tightening of fiscal policy as the alternative are unconvincing for two reasons. No feasible tightening would do the job that needs to be done, and the calls are likely to fall on deaf ears anyway. The Government is already considering its package of tax cuts for the next Budget.
The odds against a hard landing have been shortened.
Colm McCarthy is managing director of DKM economic consultants