Economic growth is unlikely to revive quickly, even in the event of a speedy resolution to the Iraqi conflict, according to IBEC. Economic fundamentals in the US have deteriorated and the Europe economy is in no shape to become the engine of growth, says the business lobby's quarterly economic review.
IBEC is calling on the Government to use the period of low growth to tackle infrastructural problems and improve competitiveness. It also warns that Government spending may need to be cut further, if tax revenues remain weak.
IBEC believes gross national product will rise by at most 2.7 per cent this year, and only 3.2 per cent in 2004. It predicts this will lead to a stagnation in employment and a rise in the unemployment rate to 5.5 per cent, from 4.5 per cent now. It also predicts inflation will fall from 4.2 per cent last year to 3 per cent this year.
The economy ended 2002 on a weak note and survey reports "indicate there was no pick-up in the first quarter of 2003 and suggest a weak start to the year," says IBEC. Against this background, the lobby says that even its modest 2.7 per cent growth target "could be quite challenging" as it would require a significant pick-up in activity in the second half of the year.
Recovery in Ireland would need an international upturn and IBEC is cautious about the prospects. Even if the Iraqi situation is resolved quickly, US growth will be hindered by its balance of payments and budget deficits, the review warns. With the outlook also poor for the EU, a period of "less than potential" growth is likely.
This means the outlook is for slow growth here, with IBEC expecting only a gradual pick-up in GNP growth of around 3.2 per cent in 2004. This could put pressure on Exchequer tax receipts, and if revenues are not as buoyant as expected, "the response must be to trim current expenditure", IBEC argues, saying that "in the second half of last year it was demonstrated that expenditure could be trimmed, given the political will".
While day-to-day spending could be cut, IBEC wants additional spending on infrastructure. With interest rates low, the Government must increase spending on infrastructure projects, IBEC believes, and fully utilise the possibilities of public private partnerships. "Borrowing at negative real rates of interest to provide essential growth enhancing infrastructure can only be beneficial," it says.
Investing in infrastructure is important to improving competitiveness, says Mr David Croughan, IBEC's chief economist. IBEC also wants the Government to take a wider approach to competitiveness, saying European Commission figures show that since 1996 Ireland's labour costs have risen by some 18 per cent faster than the euro-zone average. A group being set up under the national programme to tackle competitiveness across a wider spectrum of public spending, business development and costs "should have teeth and should be put to work immediately", says Mr Croughan.
