THESE ARE troubling times on the economic front. Across the advanced industrial world, economic growth is slowing as the global credit crunch bites deeper. At home, the pace of economic expansion is weakening. Employment growth is stalling, unemployment is climbing and inflation remains stubbornly high.
Downward revisions of the expected pace of economic expansion this year and next have now become commonplace. The principal economic forecasting institutions now anticipate that real economic growth will fall below 2 per cent this year. Some private forecasters take an even gloomier view. Moreover, the hopes of a strong economic rebound during 2009 are also receding. While economic growth should still quicken next year, expansion is forecast to be moderate when compared to the boom years.
Employment is now expected to exhibit little or no growth this year. However, additions to employment in the services sector should still largely offset job losses in construction and manufacturing. With large numbers still entering the labour market in search of work, unemployment is set to rise. Already, in the first three months of the year, the numbers signing on the Live Register have increased by 28,000. While it measures benefit claimants rather than job-seekers, it provides a good indication of short-run trends in unemployment.
Even in the face of decelerating growth in economic activity, inflation has accelerated. The annual rate of consumer price inflation has risen from 4.3 per cent in January to 5 per cent in March. This pick-up in the pace of inflation is difficult to explain. Over the past year, the euro has risen by close on one-fifth against sterling and the dollar. Ireland sources more than two-fifths of its merchandise imports from Britain and the US. The marked strengthening of the euro against sterling and the dollar has reduced substantially the cost of imports from Britain and the US. These savings should already be evident in lower prices on the shelves of supermarkets. Irish consumer price inflation should be declining as a result. Manifestly, this has not been the case.
It is against this darkening economic background that the reins of power will be passed next month from Taoiseach Bertie Ahern to Brian Cowen. Assuming power in such circumstances is not a particularly inviting prospect. There is no quick fix that can restore the Irish economy to robust health in the immediate future. Nor are conditions appropriate for any risky shifts in policy.
Mr Cowen's first task will be to steer the economy successfully through the current slowdown. Three inter-related economic areas will require his close attention. First, and most urgently, he must seek to ensure that the fall in import prices is translated into lower prices in the shops and hence into a decelerating rate of inflation. Second, he should use his new office creatively to secure agreement on a modest wage settlement in the current negotiations on a new national pay deal, a task that would be made considerably easier by lower inflation. Third, he must contain the growth of public spending within the parameters defined at the time of the Budget.