Strong economic growth is pushing the current account of the balance of payments into deficit for the first time since 1990, according to the Economic and Social Research Institute (ESRI).

This signals that demand is growing faster than the domestic economy can accommodate and that growth rates will have to ease, it argues in its latest commentary.

It says growth will remain strong this year, gradually slowing to a sustainable level in the longer term. At about 5 per cent, the sustainable economic growth expected within the next few years will put Ireland in the top half of the league of rich EU countries, says ESRI.

In its latest Quarterly Economic Commentary, however, it warns the Government against conceding "excessive increases in basic pay" to achieve a new national wage agreement. It suggests the current account balance of the balance of payments is likely to move into deficit this year for the first time since 1990.

The balance of payments measures the overall movement of funds into and out of the economy, with the current account measuring day-to-day transfers, main ly related to trade.

In forecasting this deficit, Mr Terry Baker, senior research economist, says it is "one sign that the growth in effective demand is too high to sustain indefinitely". After years when strong exports have driven up the current account surplus - estimated by the Central Statistics Office at £563 million (#715 million) last year - the ESRI says it will move into a £381 million deficit this year. This is expected to exceed £1 billion next year.

The surplus on visible trade - exports and imports of goods - will rise by about 17 per cent this year to £17.36 billion and increase by a further 11.25 per cent next year to more than £19.3 billion.

The deficit on trade in services, mainly related to royalty payments overseas and multinational subsidiaries paying parents for research and development services, is expected to increase by 30.25 per cent this year to £10.28 billion and to rise to £11.97 billion next year. Other financial outflows, including profit repatriation by multinational companies will increase, resulting in the current account deficit.

The deficit rise next year will mean it is "no longer trivial as a proportion of GNP", says Mr Baker, and at a level which would not be fully offset by normal capital transfers, such as EU receipts.

If Ireland still had an independent currency, this trend could lead to speculation against it, the report says.

As it is, the trend is "an indicator that demand is growing faster than the domestic economy can accommodate and that current trends cannot continue indefinitely".

Commenting on his last quarterly report, Mr Baker, who is retiring, said the ideal solution to maintaining strong growth with scarce resources would be another national agreement, but an agreement should not be at the expense of over-rapid pay increases, he warns.

This would lead to employment losses as the economy loses competitiveness along with trade and contracts, he says.

Any agreement must "be grounded in economic and political realities". Direct and indirect tax cuts and schemes to share profits in various ways should be used to avoid the danger of excessive pay increases, he adds.

Dismissing the recent International Monetary Fund warnings to the Government on the inflationary danger of excessive tax cuts, he says there is "no evidence that it is Government policy on tax cuts that is keeping demand higher than domestic supply can meet".

In its latest quarterly comment it forecasts that growth will remain high this year though lower than in 1998, with a strong rise in employment and a fall in unemployment, followed by further slowing of growth next year.

It warns that a general scarcity of resources will constrain future growth and stressed again that national consensus on how resources should be allocated would be important should strong economic growth continue.

Real gross national product (GNP) will rise by 6 per cent this year against a revised preliminary estimate for 1998 of 8.1 per cent, and, will be followed by 5.75 per cent growth in 2000, it forecasts.

There will be 63,000 more people at work this year, an increase of 4.25 per cent, bringing the total to 1,522,000. The average annual unemployment rate will fall to 6.3 per cent, the institute says. In 2000, employment growth will be lower, with 46,000 more people at work, though unemployment will continue to fall to give an annual average rate for the year of 5.7 per cent.

On the consumer price index the ESRI predicts a 1.6 per cent increase this year, comprising a 9.2 per cent fall in housing costs and a 2.4 per cent rise in other prices. It forecasts a 1.9 per cent increase next year when the impact of the fall in mortgage interest rates will have ended.

The ESRI expects short-term interest rates to remain extremely low until almost the end of 1999, and then to increase gradually next year, perhaps by a total of three-quarters of a percentage point.

There will be a large improvement in the public finances this year followed by further strengthening next year, it said.