Overview:SSIA funds may fuel consumer spending in 2007 but there are signs Ireland could face a moderate post-election hangover in 2008, writes Dominic Coyle, Deputy Business Editor

Energy was the watchword of 2006. The year opened with Russia turning off the taps on gas supplies to neighbouring Ukraine, a move that brought into sharp relief how vulnerable the European Union was to disruption of this key supply source for political or others reasons.

As the year draws to a close, Russia is still in the headlines, last week finally forcing oil giant Shell to concede control of the $20 billion (€15 billion) Shakhalin 2 oil and gas project.

Moscow state-controlled energy giant Gazprom also renegotiated a deal to supply the bulk of the gas needs of another former soviet republic, Georgia, for 2007, though at twice the price previously paid. The news, following months of often acrimonious exchanges, averted a Russian threat to again cut off supplies from January 1st.

Moscow's willingness to use its control over supplies to Europe as a political bargaining chip was symptomatic of the increasing desire in 2006 of developing economies to exert more control over economic affairs. However it was just one of the factors driving oil price volatility that threatened to put the brakes on what was otherwise a determinedly optimistic mood.

Having opened the year around the $60 mark, oil prices approached $80 a barrel in mid-July before easing back to end the year closer to $60.

That volatility at one stage threatened to scupper the flotation of Aer Lingus, the State airline that had spent much of the past decade nearly getting to market. In the event, oil prices eased and industrial relations issues at the airline were overcome in time for a flotation at the start of October.

Airline management had no time to bask in the success of the IPO. Almost immediately, Ryanair took advantage of the relatively low float price to launch a dawn raid on Aer Lingus that saw it snap up 16 per cent of the airline's equity just days after its privatisation.

Ultimately, Michael O'Leary's audacious move stalled as major shareholders snubbed his offer and the European Union decided to take a closer look . However, Ryanair's significant presence on the Aer Lingus share register can be expected to influence events throughout 2007.

Past transgressions continued to capture the headlines as the year progressed with top executives at a number of US companies finally facing judgment on their activities.

Ken Lay, the man who built Enron into an energy giant, was convicted of fraud and conspiracy. Jeff Skilling, the man who succeeded him and was ultimately portrayed as the architect behind one of the biggest scandals in US corporate history, was also found guilty. Lay died before sentence could be handed down but, five years after their activities crippled the company, Skilling this month began serving a 24-year-and-four-month sentence.

He is not alone. Bernie Ebbers (65), the driving force behind telecoms company Worldcom, was another high-profile executive sentenced in September to 25 years for accounting fraud.

Back in Ireland, it was reputations and wallets that paid the price at the hands of tribunals and the Revenue.

The Bailey brothers, Thomas and Michael, made a record settlement of €22 million with the Revenue in order to regularise their tax affairs, part of the €427 million collected by Revenue investigations in the first nine months of the year.

Judge Michael Moriarty handed down a damning indictment of the political tenure of former taoiseach Charles J Haughey and some of those with whom he did business, notably Ben Dunne.

If all this makes 2006 a year best forgotten, for most people that is far from the case. Ireland has never felt better about itself.

Unemployment is at historic lows and, fuelled by the ongoing property boom and the prospect of maturing SSIAs, people are singularly sanguine about their position.

The Irish market was awash with money, driving the Irish Stock Exchange's Iseq index to new heights and fuelling the rise of private equity deals. The Irish stock market may be a sideshow in global terms but for local investors, the Dublin market has delivered returns of between 19 and 26 per cent in each of the past three years. 2006 will not disappoint, with the Iseq on course for a 12-month return of 25 per cent.

The most recent data confirms that Ireland will again be the star performer in the euro zone this year, with growth likely to top 6 per cent.

However, there are signs that 2006 may prove to be the peak of this particular cycle - at least domestically. House prices are definitely slowing as consumers feel the impact of six quarter-point mortgage interest rate increases in the past 12 months and the promise of at least one and maybe two more in the first half of 2007.

That will lead to a tightening of private credit, which has been growing at levels of about 30 per cent for much of the year. It will also, almost certainly, see the re-emergence of the concept of bad debts on the books of the banks, which have been making hay on the back of the booming economy.

Inflation remains stubborn, at least by European standards. Rate rises and the Budget day increase in duty on tobacco are seen by the Economic and Social Research Institute as likely to push the consumer price index to 6 per cent next month, although inflation for 2007 is likely to settle at about 4 per cent.

The biggest fear is that the squeeze will be felt by the construction sector, which now accounts for close to a quarter of economic activity in the State as well as for one in every four jobs created in the economy. The injection of SSIA funds may continue to fuel consumer spending in 2007 but there are already signs that Ireland could be heading for a moderate post-election hangover in 2008.

Ironically, as Ireland's economy cools, its European peers finally look like awakening from the economic torpor that has bedevilled the euro zone as a whole in recent times.

And then there's the United States. Opinions on the prospects for the US economy cover almost the whole spectrum. Every piece of economic data is pored over and pronounced upon, sometimes in isolation.

Overall, despite the vaunted resilience of the US economy, cooling house prices look set to weigh on sentiment.

Views on the dollar are not uniform but those arguing that it will strengthen next year against the euro are increasingly isolated. That, in itself, will have an impact here, both in the tourism sector and on exports.

Whatever about the US economy, the dealmakers are toasting the most successful year on record for mergers and acquisitions. In Ireland, deals worth close to €15.5 billion were executed in 2006, a 35 per cent increase on the €11.3 billion of mergers and acquisitions business in 2005. As ever, that figure is minuscule in global terms where transactions worth €3,700 billion were completed.

Increasing consolidation signals continued strong mergers and acquisitions activity in next year. That will doubtless prove good news for the army of dealmakers at investment banks, where bonuses this year averaged more than $600,000 per employee at industry heavyweight Goldman Sachs. That pales by comparison with the rewards for those at the top.

Morgan Stanley's John Mack received an industry record $40 million bonus, only to be trumped within days by Goldman's Lloyd Blankfein's $53.4 million. Conspicuous consumption seems to be back on the menu. Perhaps that, in itself, should make one cautious.