Despite a muscular performance from the economy this year, worrying employment and private debt trends are surfacing, writes Marc Coleman, Economics Editor

It was a very good year, or was it? In George Orwell's book 1984, the citizens of Oceania spend their dull lives listening to state propaganda on the economy. "Comrades will be pleased to hear that, due to the excellent leadership of Big Brother, chocolate production has risen this year by 30 per cent, wheat production has risen by 40 per cent and production of tanks has increased by 20 per cent."

But the novel's anti-hero Winston Smith was destined to reconcile the cheerful news blasting over the ubiquitous TV screens with the dismal reality of his own life.

In the heroic 1990s the tide was rising and we could feel our boats rising with it. Now great news about the economy continues to roll out, but during the year consumer sentiment surveys suggested that the good mood has dissipated.

According to the August consumer sentiment report produced jointly by the Irish Intercontinental Bank (IIB) and Economic and Social Research Institute (ESRI), oil price increases and Eddie Hobbs made us less happy about our economic state.

They are not in themselves the cause of malaise. For years, concern about the cost of living has been mounting. Then came this year's oil price increases. Eddie Hobbs' dissection of rip-off Ireland proved to be the last straw and produced the greatest national whinge in decades. But are things really that bad?

Economic growth statistics have had an Orwellian ring since the mid-1990s.

If you believe Government forecasts, then Gross Domestic Product - the measure of the value of goods and services produced in the economy - will have grown by 4.5 per cent in real terms this year. By the standards of the EU, this growth performance is a good one.

Adjusting for general price increases in the economy, the value of goods and services will rise in money terms by almost €11.3 billion.

Those forecasts are probably correct - they fall in the lower to mid-range of various private sector forecasts. So what happened to all the money?

Almost half of it went on increased Government spending, which grew by 11.5 per cent. Government tax revenues are expected to have increased by almost €4 billion this year, an increase of close to 8 per cent. Personal consumption grew by €3.6 billion this year and a fair chunk of this went on car purchase, of which roughly 167,000 will have been acquired by the end of this year.

Whatever Eddie Hobbs says, price increases were moderate this year. Consumer price inflation was 2.5 per cent, broadly in line with our European partners. There is some evidence that Irish inflation picked up towards the end of the year as oil price pressures filtered through the economy, but inflation looks set to remain low by historical standards.

There are several blemishes on the face of our economy. The first is productivity, which declined slightly this year. However slight, this happened at a time when our competitors' productivity was rising quickly. And the productivity story has left its mark on the labour force.

According to forecasts in the FAS employment review, the number of persons seeking work grew by around 95,000 this year, the vast majority of whom found jobs. Some 30,000 of these new jobs were created in construction and 57,000 in services, of which a large proportion were created in the public sector.

But these sectors of the economy are hardly the cutting edge drivers of high-tech growth of the kind favoured by the Enterprise Strategy Group report on the economy. That report called on Ireland to "move up the value chain". As far as the latest evidence is concerned, we are moving exactly in the opposite direction - the number of jobs lost in industry was 4,000 last year, while agriculture shed 3,000 jobs.

This matters because the boom in construction is a temporary one causing a massive bulge in jobs numbers. Over a quarter of a million people now work in the sector, an unprecedented 12 per cent of the workforce. That compares with an average of 8 per cent of the EU work force working in construction.

Now let's assume the construction boom ends in, say, two years time, and that Ireland's proportion of construction workers converges with the EU average as a result.

That implies that around 80,000 people will become unemployed. Some of these will be immigrants. But at least half will not be, or will want to stay here for personal reasons. And if attrition continues in industry and agriculture you can slap on another 10,000 job losses in those sectors.

That means that our unemployment rate will be heading north in a few years time. Or the Government will decide to absorb more unemployment by increasing public sector employment.

While we're on this latter point, in spite of promising to reduce public sector numbers by 5,000, the Government has actually increased public sector employment by 15,000. So 20,000 of the increased employment is Government driven.

Behind every great construction boom is a great lending boom. Private sector borrowers raised their stakes by €50 billion last year.

This was driven partly by business investment, partly by housing construction and partly by consumption-driven lending. But with Ireland now the second most indebted nation in the EU after the Netherlands, our personal debt situation, while not yet grave, is approaching a moment of truth.

It isn't so much that the level of debt itself is unjustified. Most of it probably is thus far justified. Our population is young, we need more housing and our infrastructure is decrepit.

The real significance of the growth in debt is how it is affecting our perceptions of the rest of the economy.

Those Orwellian statistics about growth in employment, tax revenues and jobs are all true. There is no malign propagandist inventing them. The question is as follows: What happens to that employment growth and tax revenue when that revenue growth slows down?

What will next year bring? More of the same, probably.

The truth is that the economy is not a human being. It does not wake up on January 1st and make New Year's resolutions like: "I'm going to be a really productive, lower-price and lower-debt economy next year, by golly I am!"

Economies are big slow movements in income, prices, goods and services. Their momentum does not stop for particular dates on the calendar and developments in 2005 should continue, barring shocks, into 2006.

Demographics and rising income will keep housing construction and consumption strong. A high cost of living and the rising competitiveness of competitors will keep export performance poor and foreign direct investment subdued.

Momentum will be given a push in the second half of the year when special savings incentive accounts (SSIAs) begin flowing into the economy to the tune of at least €14 billion.

Lending growth will also continue in double digits and will seep into the economy in subsequent years as the relevant deposits are drawn down.

The three possible shocks to the scenario are:

Rapid increases in ECB interest rates;

A drastic fall in the value of the dollar;

A property market crash (precipitated by the first two factors).

The first is improbable and the second is unlikely (but horrific if it happened). As for the third, readers deserve to enjoy their Christmas holiday in peace without thinking about this one.

These shocks are unlikely to occur next year. The dollar should remain stable, the ECB will raise rates gently and property prices will, at worst, grow by more reasonable rates.

The danger to the economy lies beyond 2007 and is twofold. The first is the reaction of consumption, investment and government revenues to the inevitable slowdown in lending, which should come around 2008. The second is the slow death of Irish competitiveness which, if left unchecked, will come to full fruition in further attrition in manufacturing employment.

Like citizen Winston Smith, we know that life is easier if we don't question statistics too much. They are abstract and people's views on the economy change only if they are affected by it.

So far the view of the general public has been made negative only by high prices and we have weathered worse problems than that in the last 20 years. Any significant economic worries are a few years away yet. If and when they come, no amount of statistics will disguise its reality.