Five years ago, when if you asked about the "Celtic Tiger" you were likely to be directed to the zoo, the ESRI's medium-term forecasters predicted that economic growth would average almost 5 per cent in the years to 1998 and growth might even reach 7 per cent in one or two years. All very well in theory, was the general response, but it will never be that good in practice. The economy was just recovering from the traumas of the currency crisis and a sustained spurt in economic growth seemed as unlikely as us being members five years later of a European single currency.
As it turned out, the ESRI forecasters had, in fact, underestimated the extent of the boom. Economic growth between 1993 and 1998 has averaged more than 6 per cent and employment has risen much more rapidly than anyone, the ESRI included, had anticipated. Their forecasters, however, deserve credit for predicting a strong pick-up in economic growth and for pointing to some of the policy implications this entailed.
Now, as the latest medium-term outlook puts it, the economy is "fully wound up and moving very fast". And the forecast? The ESRI believes that "over the next decade it is likely to unwind gradually and eventually return to the EU average rate of economic growth after 2010.
"By 2005, or so, Irish average living standards should be on a par with our EU neighbours, completing the process of convergence which has been underway for most of the 1990s by 2005 or so." Not quite two BMWs in every drive perhaps, but if this forecast is achieved it will represent a remarkable milestone as the hopes raised when we first joined the EU are finally realised.
To achieve this, the economy will need to grow by around 5 per cent a year over the next five years. This would be somewhat slower than the last couple of years - in 1998 for example, GNP grew by 7.9 per cent and the forecast for this year is 6.3 per cent. But growth of 5 per cent plus would still be an exceptionally strong performance as it would be well ahead of both the average growth or our economy over the past couple of decades and the average of our EU partners.
The ESRI predicts that the economy will gradually slow, with growth of 5.8 per cent next year, 5.5 per cent in 2001 and around 5 per cent for each of the next few years. As the forecasters themselves say, however, too much weight should not be attached to the precise forecast for each year, given the difficulties of medium-term economy forecasting, particularly in an economy like Ireland which is very open to external influences.
It is, by any standards, a promising outlook. "Provided that wage expectations do not run ahead of the ability of the economy to deliver," the forecasters write, "it seems possible that the labour market will see almost full employment in the medium term, with the unemployment rate hovering around 5 per cent."
Living standards for those already in work should also steadily increase. Much of the fruits of economic growth in the last couple of years have gone in increasing the number of people at work. But as this rise in total employment slows down, more should be left to reward those already in work. Real after tax wage rates for those in employment could rise by around 3 per cent a year over the next decade, the report says, almost 1 per cent a year faster than in the 1990s.
With the reduction in unemployment, fewer people will have to rely on social welfare payments. But for those who do, the ESRI believes that welfare rates will be indexed to the growth in average earnings and points out that groups such as lone parents and their children and those in low-paid employment are at risk of remaining in poverty. The shortage of social housing is seen as a major issue in this regard.
So could it all be thrown off track? Of course it could. But the striking thing about the ESRI chapter on what could go wrong is that it would require something fairly dramatic to throw the economy seriously off course. Only incompetence or bad luck will bring the economy skidding to halt. The ESRI examines the threat of external shocks - caused by a sharp rise in euro zone interest rates or by a major fall in the US equity market.
In both cases it says that GNP growth could be knocked back to below 2 per cent for a period, though should subsequently bounce back. Domestic policy failure, on the other hand, caused by a combination of wage increases knocking competitiveness and a lack of investment in infrastructure, would knock 1.5 percentage points each year off the growth rate, with the effect potentially lasting for a prolonged period.
All the forecasters can do, of course, is to look at the rough orders of magnitude which would be involved in these cases, as how exactly a particular crisis might play out in the real world is very difficult to forecast. Remember, for example, the many predictions of gloom and global deflation due to the crisis in Asian economies over the past couple of years, which subsequently proved far too gloomy.
The document does make one crucial point, however. It warns that in the event of the economy being hit by a shock, the bubble in the housing market could be our Achilles heel. The housing bubble here will not be burst by higher domestic interest rates, as happened in Britain in the late 1980s. But a big rise in euro-zone interest rates could seriously knock confidence in the market here, as could a fall-off in employment caused by, say, a big fall in the US equity market which could hit some of the major multinational operations here. The danger at the moment is that everyone is piling into the housing market, pushing prices to what may be unsustainable levels. If the economy is hit by a shock and employment falls, the demand for houses could take a nasty short-term shock and, if this leads to prices starting to fall, then new buyers could decide to hold on to their cash for a while in the hope of picking up a cheaper property in the future.
"The cumulative effect of such a change could see the potential housing bubble burst," the ESRI warns, "with prices falling by a large amount". It is important to realise that this is not what the ESRI is forecasting. Indeed its analysts believe that it is more likely that the housing market will gradually reach a top, with house price stabilising and eventually falling slowly in real terms (i.e. after allowing for inflation). But if things do start to go wrong economically, they point to the housing market as a key area of vulnerability.
Things, of course, are never as smooth in real life as they are in medium-term economic forecasts. Such are the interconnections in the global economy that a crisis starting on the far side of the world could completely upset the benign economic outlook in the ESRI document. For the moment, however, the international environment looks reasonably favourable. The main euro economies are starting to recover, while both the US and Britain also look reasonably healthy. This provides a good outlook in our main export markets. While interest rates in the euro-zone are on the way up, all the signs so far are that the rise will be very gradual and that borrowing costs will remain relatively low for the foreseeable future.
Indeed, if one was looking for a point of vulnerability in the international economy which could affect Ireland's prospects over the next year or so, then the US equity market and the prospect of a serious correction there would appear to be the main one.
This danger apart, the main threats to the ESRI's outlook are more likely to come from home than from abroad. A major investment in infrastructure is clearly needed; the money is there now, but the question is whether we can get our act together to put it to use, quickly. If we cannot - and factors like the planning process could prove major obstacles - then congestion could slow the forecast growth of the economy.
Other dangers are more pressing. The threatened nurses' strike is just the tip of an iceberg of dissatisfaction with the way the fruits of success are being spread. In the months ahead this will create enormous pressure on the Government to concede higher pay increases and dole out massive tax reductions in the Budget. The ESRI's call for a prudent tax and spending policy to build up a budgetary buffer which could be used if the economy turns down is likely to be ignored. The dangers are clear. Pay increases in the public and private sectors could be granted which quickly erode the economy's competitiveness. Add in major tax reductions and the expectations of more to come and the Government could be storing up budgetary trouble in the future, when the economy slows. The decisions made in the next few months will be crucial, as the social partners attempt to renegotiate a national agreement and the Government plans a Budget to try to encourage them to do so.
Society must also cope with other issues. The increasing participation of women in the workforce challenges employers to be more supportive in providing childcare facilities and more flexibility. We must also develop policies to deal with immigration, as skilled and unskilled foreigners are attracted to our booming jobs market. And a new strategic vision is needed of our place in the EU, which moves away from the old grant hand-out mentality.
It is a complex and challenging agenda. But at least the ESRI believes that we can face it against a background of continued economic buoyancy. The party will go on, they believe, unless we end it by fighting between ourselves for too big a share of the punchbowl.
