ESRI forecasts soft landing for economy

The economy will avoid recession this year as it heads towards "an incredibly soft landing", according to forecasts contained within the latest commentary from the Economic and Social Research Institute (ESRI).

The influential think-tank warns that unemployment is set to rise sharply over coming months however and says inflation is likely to remain a problem even as it begins to decline.

The ESRI also urges the Government to take advantage of prevailing low interest rates to increase "economically justifiable" capital investment that will ensure "balanced future growth".

The ESRI has shaved its gross domestic product (GDP) growth forecasts for this year from 4.2 per cent to 3 per cent and has cut gross national product (GNP) expectations from 3.3 per cent to 2.5 per cent.

Against this background, the ESRI is expecting unemployment to rise significantly before the end of this year, as jobs growth in the public sector dries up.

Unemployment is forecast to average at 5.3 per cent in 2003 and 5.5 per cent next year.

"It is estimated that employment growth will actually cease in 2003," the ESRI says in the commentary, which will be published today.

Inflation will remain "an issue" for the Government, the ESRI says, warning that, despite an expected drop in inflation over the remainder of this year and in 2004, price growth in the Republic will remain higher than in competing countries.

The housing market is set to plateau over the coming two years, the ESRI's economists believe.

They are predicting growth in house prices of about 5 per cent this year and next, thus seeing the housing market move into step with wider inflation.

The wage terms contained within the new social partnership agreement will help to "solidify this dis-inflationary trend", according to the ESRI commentary.

The agreement, if successful, will ratchet wage growth towards 3-4 per cent, thus "moving the economy more in line with sustainable, productivity-justified pay", the ESRI believes.

Mr Danny McCoy, ESRI economist and editor of the report, said that such a progression would be "a great achievement".

The ESRI sees the public finances continuing to deteriorate this year but acknowledges that, on a cyclical view, the underlying position is sound.

The general Government balance is forecast to be in deficit by 0.8 per cent in 2003 and 1.3 per cent in 2004.

Such a performance would leave the Republic well within the existing terms of the Stability and Growth Pact.

The ESRI is strongly in favour of a reworking of the pact, however, and Mr McCoy has urged the Government to take a lead position on its reform when the Republic takes up the EU Presidency next year.

"We should punch above our weight," Mr McCoy said.

The ESRI judges that the economy is passing through "a unique phase" whereby "extraordinarily low" interest rates are outpaced by real growth rates.

The commentary foresees euro-zone interest rates declining by a further 0.25 percentage points this year before climbing back to 3 per cent by the end of 2004.

While the ratio between growth and the cost of borrowing must be rebalanced over the longer term, current conditions are positive for capital investment, particularly for projects that "justify financing", the ESRI notes.

Borrowing for investment should not be entertained unless the prospective rate of return is "sufficiently high", the commentary cautions.

The ESRI believes that GNP growth hit its lowest point for 17 years in 2002, with growth of just 1.1 per cent.

This led to a "record gap" between GNP and GDP, which reflected the treatment of profits and earnings by the Republic's multinational sector, according to the ESRI.

The institute's economists are expecting the differential to narrow in 2004, predicting that GNP will grow by 3.5 per cent and GDP by 3.7 per cent.