The Irish economy has performed remarkably strongly so far this year, but some caution is warranted in the light of international developments. Last Friday US jobs figures provided further evidence that the world's biggest economy slowed significantly in the summer months, creating some nervousness about the outlook for the rest of the year. A key contributory factor to this uncertainty is oil prices which touched new record highs last week and are now at levels which, if sustained, would slow growth in the second half of this year.
The US economy grew at an extraordinary pace in the first quarter of this year, but Friday's employment figures for July confirmed that this hectic pace has slowed considerably. Analysts had expected an increase of up to 230,000 in total employment during the month, so the reported increase of less than 32,000 came as a disappointment.
The Federal Reserve Board, the US central bank, has so far presented this as a "pause" and believes that growth momentum will re-establish itself in the second half of the year. For this reason it is expected to announce a 0.25 of a percentage point increase in US interest rates tomorrow as it moves monetary policy back towards a balanced position. Interest rates are so low - tomorrow's expected rise will bring them to just 1.5 per cent - that Fed policy is still supporting economic growth. Nonetheless rising interest rates will be a key factor for the US economy heading into 2005.
While higher interest rates are designed to provide a gentle brake on economic activity, the threat from higher oil prices is more immediate. The cost of a barrel of oil has now risen by more than a third in the past year and there is no immediate easing in sight. If sustained at current levels, oil prices will slow growth, but do not threaten to send the world economy into recession. However, some forecasters warn that they could yet head higher, perhaps to $50 a barrel or more, and if this is the case, then the growth outlook will be seriously affected.
Fortunately our economy has performed well. Unemployment has fallen to 4.4 per cent and the Exchequer finances are in a healthy state. Economic growth is healthy here by international standards, though it remains well below the levels seen during the boom years from 1996 to 2000.
The uncertain international outlook calls for some caution in setting economic policy. The new Minister for Finance will have some scope on Budget day to alter taxes and push up spending, but the Government would be wise to retain a prudent approach. The experience before the last election showed that big increases in spending do not necessarily show through in better services. And after the last election we saw how difficult adjustments can be required in our public finances when a period of profligacy coincides with a slowdown in international growth. As they lay their spending plans for 2005, Government ministers should remember this.