The economy is in a period of slow growth which will last into next year, but recession is not in prospect. This is the message from the latest quarterly commentary from the Economic and Social Research Institute.
Its researchers believe that the economy is heading for a "soft landing" with Gross National Product set to rise by 2.5 per cent this year and 3.5 per cent in 2004. Total employment will stall and the unemployment rate will rise to 5.5 per cent by next year, according to the commentary, published this week.
If the economy can record economic growth on the scale forecast by the ESRI, then it will still be a respectable performance by international standards. There is no doubt that the economy is now suffering from the international downturn. Exports in most sectors are falling, unemployment is rising and survey indicators are grim.
A general international upturn is required if growth here is to meet the ESRI's predictions. The end of the war in Iraq may help to lift confidence, but fundamental economic problems remain in all the major economic blocs.
The key to an upturn would be a resumption of business investment, but to date this does not appear to have started. US company results published this week provided a mixed picture - so far they were not as poor as more pessimistic analysts had feared, but big companies such as Microsoft are striking a cautious tone.
Against this difficult background, the ESRI forecasts do have some encouraging aspects. Its forecasters say that the rate of inflation should now fall steadily, averaging 4.3 per cent this year and 3.2 per cent in 2004. The terms of the new national agreement, Sustaining Progress, should move the economy towards "productivity-justified pay rates," the commentary says. Market pressures should ensure that the terms of the deal are not exceeded in the private sector; in the public sector, it is essential that the productivity improvements intended to form part of the justification for increases under the benchmarking process are delivered.
The Government must heed the ESRI's comments on infrastructure spending. A "more focused" approach to setting investment priorities is needed, it says, at a time when resources are tight, but low interest rates should allow some borrowing for productive investment. Crucially, of course, such borrowing can only be justified if the investment projects can give a genuine economic or social return. In planning major projects to date, far too little attention has been paid to ensuring such a return and this must change at a time of tight resources.
