Bubble, bubble, toil and trouble. As the Irish economic cauldron grows hotter, warnings are becoming ever more dire that there will be a price to pay. Already, controversy is building over the shape of the 1999 Budget and the Government is being warned to "watch out" by a host of commentators and international bodies.
But no one has yet come up with a course of action open to the Government to offset the inflationary threat. This is hardly surprising, because just at the time when they need it most, policy makers here have no economic brake peddle to push, as we hurtle ever faster towards monetary union.
Parts of the economy are certainly showing bubble symptoms. House prices have shot up, share values have soared and in parts of the jobs market, skilled employees can almost name their price. Forecasters now believe that the economy may grow by 10 per cent to 12 per cent this year. There are some signs that the general rate of inflation may be on the up and up.
However, the extent to which the economy is showing the signs of a classic Asian-style economic bubble are open to question. Rising house prices are the clearest symptom of a classic economic bubble, but Jim O'Leary, chief economist at Davy stockbrokers, points out that house-buyers are now counting on much lower and more stable interest rates for the term of their loan than would been the case five years ago. With incomes also rising and strong demand for houses due to demographic factors, he says prices should not fall sharply in the years ahead, even if they do level out.
Another warning signal, related to the housing market, is the sharp rise in borrowing from banks and building societies, now growing at a rate of 20 per cent plus. And the "bubble" test here is whether the loans are sustainable and solidly based, or whether both borrower and lender are storing up trouble. The strong rise in borrowings could add to the economy's exposure if growth slows.
The final area where the economic warning lights are starting to flash is the jobs market. Wages and salaries are now rising sharply in some sectors and employers are struggling to find and to hold on to talented staff.
So, the high growth rates seen in recent years may be leading to problems, even if we do not yet have all the signs of the classic economic bubble. One thing for certain is that the kind of economic growth rates of 810 per cent-plus over the past couple of years cannot be sustained indefinitely. Wage pressure and skills shortages are two factors likely to contribute to the slowdown. But the question is whether we are heading for a gradual slowdown or a hard landing? And whether the bubbling parts of the economy are leaving us dangerously exposed?
If we were not heading towards monetary union, the Government and the Central Bank would already have moved to try to offset the dangers and slow the economy. Interest rates would be a couple of percentage points higher and borrowers would be fearing further increases. With rate rises not being an option, the only tool open to the Government to influence the overall level of economic activity is the Budget. UCD economist, Brendan Walsh, last week called on the Government to run a tight policy and not to cut taxes further, which drew an angry response from the trade union movement. Certainly, a generous Budget with sharp increases in Government spending and major tax cuts along the lines of the 1998 package would risk adding further fuel to the economy's fire. But the extent to which the Budget actually affects the overall level of economic activity is debatable in a small open economy like Ireland. The best Budget mix might be tight current spending control and a tax package which offers some reductions, in order to encourage employees not to demand too hefty wage increases. As Jim O'Leary points out, the Budget could aim to increase the supply of labour coming on to the jobs market by selectively reducing taxes. The worrying thing from a policy point of view, however, is that whatever is done in the Budget, the economy will still enter monetary union with a large head of steam built up. And anyone who claims to be able to forecast when and how it will end must possess a crystal ball.
The best that could happen is that growth will gradually slow over the next couple of years, allowing pressure to ease on the jobs market and achieving a painless "soft landing". The worst scenario is that the economy is hit by bad times perhaps due to some kind of international slowdown sparked by the Asian crisis and that this combines with a pick-up in inflation at home which threatens our international competitiveness.
Perhaps, what is most likely to happen will fall somewhere between these two extremes.
The most obvious danger is that a rise in inflation leads Irish businesses to start to lose competitiveness, leading to a gradual and grinding downturn in our performance, as opposed to a full-scale recession.
We also have exposure to a number of other risks, such as a sharp fall in sterling's value or a crisis in the high-tech sector. Chris Johns, head of investment strategy at AIB Capital Markets, points out that the economy here has some parallels with New Hampshire in the US. It boomed for many years and experienced soaring house prices because of a thriving electronics and defence sector. But it was cruelly exposed when these sectors hit hard times in the late 1980s and early 1990s and the US economy itself slowed.
The danger of the bubbling parts of the economy is that they leave us much more exposed if a downturn comes. In themselves, they pose a threat of pushing up the general rate of inflation and hitting competitiveness. And the worrying thing is that bar specific measures such as the moves to try to curb house prices there is very little that the Government can do apart from sitting back and praying for a soft landing.
