Economic indicators published to date for 2000 show activity remaining very robust. Nowhere has the continuing strength of economic activity been more evident than in consumer spending. New car sales rose by 40 per cent in the first eight months of 2000, according to data from the Society of the Irish Motor Industry. This follows a 20 per cent rise in 1999 and means that new car sales this year are likely to be treble their level in 1994, when the current economic upswing commenced.

Meantime, excluding the auto sector, retail sales rose by 9.5 per cent in the first half of this year compared to an 8 per cent rise in 1999.

In the manufacturing sector, data from monthly IBEC/ESRI surveys point to strong growth in industrial output this year. This is borne out by exceptionally strong export figures for the first half of 2000. Balance of payments data indicate that the volume of exports of goods and services rose by more than 20 per cent in the first quarter of the year. More recent external trade data point to a continuation of this pattern in the second quarter. This is a marked acceleration on the 12.5 per cent rise in exports recorded in 1999.

In the construction sector, employment growth has picked up since the start of the year, rising by 7 per cent year-on-year in the second quarter compared to 5 per cent at the end of 1999. Homebond registrations, a good proxy for housing starts, rose by 17 per cent in the first eight months of this year, following increases of 16 per cent in 1999 and 7 per cent in 1998.

It would appear then, that the pace of economic growth has accelerated this year. We expect GNP to rise by around 9.5 per cent, compared to 7.8 per cent in both 1998 and 1999.

The acceleration in growth is due to a number of factors, in particular the lagged effects of the sharp fall in interest rates in 1998/99, an increasingly stimulatory fiscal policy, rapidly rising disposable income, the upswing in the EU economy since mid-1999 and the sharp fall of the exchange rate since the start of 1999.

Continuing robust economic growth has seen labour market conditions tighten even further. Labour force statistics for the first half of 2000 show employment growth up by 5.6 per cent year-on-year. The unemployment rate fell to 4.3 per cent in the second quarter of the year, down from 5.7 per cent in the same period in 1999. Most notably, the number of long-term unemployed (i.e. people out of work for more than one year) fell to just 27,000 in the second quarter of 2000, or 1.6 per cent of the labour force.

Rapidly rising employment has been a key factor in facilitating the buoyant growth of the economy since 1994. GNP growth has averaged 7.8 per cent since 1994 while employment growth has averaged close to 5 per cent, a marked acceleration on earlier years. Productivity growth, on the other hand, has continued to run at around 3 per cent per annum, the trend rate evident since the 1960s. Tightening labour market conditions combined with a slowdown in labour force growth imply that employment growth is set to decelerate in the coming years, resulting in a marked moderation in the growth rate of the economy.

Indeed the latest labour force data show this process is already under way. Growth in the labour force decelerated to 3.4 per cent year-on-year in the second quarter of 2000, down from 5 per cent in the previous three quarters. Employment growth decelerated for the third consecutive quarter to 5 per cent year-on-year, down from a peak of 7 per cent in mid-1999. Meantime, with the unemployment rate now down around 4 per cent, the available pool of jobless workers is drying up.

Given the emerging labour market constraints, we expect there will be a marked deceleration in the pace of economic growth in 2001, with GNP rising by 7 per cent, down from 9.5 per cent this year. Employment growth looks set to fall to below 3 per cent by 2002, pointing to GNP growth decelerating to under 6 per cent. This would be the slowest rate of economic growth since 1993.

Other factors also suggest that the pace of growth will moderate. Rising interest rates are likely to see some deceleration in the pace of consumer and investment spending. The acceleration in growth in the world economy appears to have peaked, as rising oil prices, as well as rising interest rates, curtail activity. This will dampen exports.

Furthermore, the Government is coming under pressure to bring in a less stimulatory budget for next year, given the clear evidence of overheating in the Irish economy. Indeed, the pick-up in wage inflation will also act to slow activity through a loss of competitiveness, especially in the event of a turnaround in the fortunes of the euro.

Thus, the halcyon days of growth rates of 8 to 10 per cent for the Irish economy are coming to an end. However, Ireland is still likely to continue resembling the high-growth US economy rather than our less dynamic European neighbours.

Oliver Mangan is chief bond economist with AIB Group Treasury