The Government must beef up competition and regulation in sheltered sectors of the economy if it wants to avoid a fresh inflation problem, the OECD has warned.
The Paris-based think tank said yesterday that Irish policy must be tailored towards safeguarding cost competitiveness.
This is particularly necessary because foreign direct investment is "unlikely to be as strong as in the past", according to the OECD, which includes the warning in its latest commentary.
The OECD is forecasting an an otherwise benign economic picture for the Republic over the next year and a half, with gross domestic product (GDP) expected to grow by 3.5 per cent this year and by 4.5 per cent in 2005.
The performance is to be underpinned by both an improving world trade picture and sound domestic demand. The OECD is expecting business investment to recover over coming months, with profit margins also to be boosted.
Unemployment is set to remain below 5 per cent over the next two years, the OECD's economists believe.
They are also expecting inflation to settle around 2 per cent, but are concerned that a re-acceleration of wage growth or a further appreciation of the euro could undermine the overall economic recovery.
A hike in bond yields (and a consequent rise in fixed mortgage rates) could, in addition, undermine consumer confidence by leading to a downturn in the housing market, the Paris economists believe.
The latest predictions on the Irish economy leave the OECD towards the middle of a range of forecasts that have emerged over the past few months. Its growth predictions exactly match those of the Economic and Social Research Institute.
The OECis expecting the Irish economy to revert back to its potential growth rate of 5 per cent over the medium term. This is because the Republic continues to benefit from a fast-growing labour force and a strong position in high-technology sectors, according to the study.
The OECD argues however that "the Celtic Tiger era of double-digit growth rates spurred by foreign direct investment belongs to the past". The report concludes that the the likelihood of a housing crash in the Republic is remote.
The housing market is set to remain "in excess demand" as long as interest rates stay low and construction bottlenecks persist, according to the OECD.
It judges that increasing public spending on infrastructure should be offset by a cap on current expenditure. In a similar vein, the OECD says that growth in public-sector wages should be offset by slower public-sector employment growth.
