The polarisation of views on the Irish economy has never been more extreme, according to the Central Bank's assistant director general.
Dr Michael Casey said yesterday that on the one hand there were those who believed a hard landing was imminent, and on the other there were those who said the economy was excellent and little could go wrong. The Central Bank is in the middle.
But if the tone of yesterday's winter commentary is anything to go by, it is far closer to the doomsayers than it has been to date. The Bank is obviously unhappy with the stimulus the economy has been given through tax cuts, spending increases and wage hikes.
Officials say the economy is in uncharted territory and there are few relevant examples from abroad. What is true, as the Bank's head of economic affairs, Mr Tom O'Connell, said, the economy is operating at close to full capacity and with unemployment at under 4 per cent how could that be otherwise? Pouring more money into such an economy will boost demand; the only question is can the economy absorb it? The consensus is that a sharp slowdown needs an outside stimulus - an interest rate, employment or exchange rate or credit shock.
Trade data with non-EU countries yesterday showed exports up some 95 per cent in October from a year earlier or 47 per cent on a 12-month basis, implying the economy is still growing rapidly. Interest rates may even come down next year, so the risks lie mostly with employment and the exchange rate.
As the Bank stated yesterday, there are signs that a sharp downturn may be on the way in the US. Last night, the US Federal Reserve was even more categoric, warning there was now a risk of a sharp downturn. The optimists will hope that a rate cut in January may head off the worst effects. But there is a risk it will have a serious impact on US multinational investment decisions here.
As part of a single currency exchange rate shocks were meant to be a thing of the past. But in the past 18 months the euro has plummeted; a sharp reversal could put indigenous exporters under particular pressure.
French finance minister Mr Laurent Fabius has predicted a 20 per cent appreciation in 2001. But even that would mean the euro still trading below parity against the dollar, hardly a position which would put competitive firms out of business.
A shock through the financial system is the last worry. The Bank insists that all its tests show no endemic risk so far, yet it remains on guard. Even under the worst case scenario of a 60 per cent drop in house prices, interest rate hikes and rising unemployment, it found there would be no risk to any of the bank's capital ratios. Moody's and S&P, which recently have issued reports on the Irish banking system, support this view.
Despite all this reassurance, the Central Bank remains worried and the governor, Mr Maurice O'Connell, has written yet again to the banks asking them to step up their procedures. As Dr Casey said yesterday, the Minister for Finance, Mr McCreevy, may be gambling that rising oil prices and a strong euro will ease his inflation problems. That remains the most likely outcome and one which more than Mr McCreevy will be hoping for.
