Outlook:On top of strong credit growth and Government spending, 2007 seems to offer much the same as 2006, writes Marc Coleman, Economics Editor

An economy before an election year is like a teenager's bedroom on the day before pocket money - unusually good looking. But looking and being are different things.

For as much of 2006 as we have numbers to measure it, the economy kept roaring along. The latest estimate for real growth for 2006, 5.4 per cent, is over twice the EU rate and barely unchanged from the rate at which the economy grew in 2005. The outturn couldn't have been better for the Government.

Towards the end of last year a very different picture was emerging from the Central Statistics Office. According to its quarterly national accounts for the first half of 2005, growth in the economy had slowed dramatically from over 7 per cent in the first quarter of 2004 to just over 3 per cent in the first half of 2005. A continuation of that trajectory would have made Brian Cowen's recent budget a different affair than it was.

Thankfully for the Government, it wasn't to be. A growth upswing in the second half of the year put matters back on the rails, with personal consumption and construction pushing the economy forward strongly into the early months of 2006. With growth for the year projected to be over 5 per cent and employment growth in the 12 months to August - the latest month for which data is available - amounting to 83,500 jobs.

A closer look at the employment number revealed a slightly different picture. For a start the total numbers employed - although good by comparison with any other EU country - was lower than the 95,700 jobs increase recorded in the 12-month period to August 2005.

Some features of this employment growth were remarkable. For the first time since pre-famine, the number of workers in the State passed 2 million.

And for the first time the share of females participating in the labour market passed the 60 per cent threshold, a target set by the 2001 Lisbon Agenda. Perhaps the most fascinating statistic of all was that almost half of all new jobs created in the three months to last August, 48 per cent to be exact, were being filled by foreign nationals.

Worryingly, the dependency of employment growth on the non-traded sector continued to intensify as the year went on. Of the jobs created between August 2005 and August 2006, the construction sector contributed just over 24,000, while public administration and defence and health - the two overwhelmingly public sector categories - contributed another 25,000. The latter increase was notable because the Government had promised in 2002 to cut public sector numbers by 5,000.

One bright spot on the horizon was the manufacturing sector. After a prolonged decline, manufacturing employment bottomed out at 285,000 in February and spent the rest of the year growing at a healthy clip. But the fact remains that - as of August - some 277,000 work in the construction sector. This compares to barely more than that, 297,000, working in manufacturing.

So large has the construction sector become this year that it might be likened to a sword of Damocles hanging over the economy. As well as employing one in eight of the workforce, separate analysis of the sector by the ESRI and Goodbody stockbrokers attribute one quarter of all economic activity here to that sector.

Its force was also felt strongly in the coffers of Government. From a respectable 10.3 per cent last year, tax revenues grew by just under 17 per cent in the year to November. The difference between those two numbers was accounted for by one thing; the great Irish property market. From modest rates of about 5 per cent, house price growth accelerated sharply from the end of last year.

So strong was house price growth in the last quarter of 2005 that it dragged up the annual average price increase for that year to 8.9 per cent. Carrying its full momentum into 2006, house prices have grown another 11.6 per cent in the first 10 months of the year. This, combined with the non-indexation of property related tax bands in previous years, pushed stamp duties up by 40 per cent year-on-year in the year to October. Not to be outdone, capital acquisitions tax and capital gains taxes grew respectively by 64 and 40 per cent over the same period.

By keeping spending below target, the Government kicked the surplus cash into next year and some of this year's economy will live on next year in the form of an 11 per cent hike in Government spending, not to mention generous tax cuts.

In a vain effort to curb our wild excesses, the European Central Bank (ECB) kept up the pace of interest rate increases, upping its main refinancing rate five times in the course of the year, from 2.25 to 3.5 per cent. The Central Bank's Financial Stability report, while sanguine on the overall risks to the economy, noted that a rising number of younger and more recent borrowers are now becoming seriously exposed to continued rate increases.

By Irish Intercontinental Bank (IIB) chief economist Austin Hughes' reckoning, between 50,000 and 100,000 are being seriously squeezed by the effect of rate increases. Even if the economy survives them, another two rate hikes before the election could yet help determine the outcome of a few Dáil seats and, perhaps, the election itself.

What do developments in 2006 say about next year's performance? One event that straddles both years is of course the release of SSIA funds. Between May 2006 and May 2007 between €14 and €17 billion will flow into the economy. On top of still strong credit growth and Government spending, 2007 seems to offer pretty much the same as the year it followed.

The trouble is that SSIAs, credit growth and strong increases in Government spending form no sustainable basis for continued growth beyond 2007. 2008 could be an interesting year indeed.