The Central Bank is stepping up pressure for wage restraint, warning that excessive pay rises could lead to job losses through falling profit margins and competitiveness. The Bank has also criticised the Budget for pouring too much money into the economy although its own estimates indicate that growth will continue and numbers in employment will rise strongly.
Presenting the Bank's last quarterly bulletin as an independent institution before the Republic adopts the euro currency on January 1st, its assistant director-general, Dr Michael Casey, identified the escalation in wages as the most worrying sign for the economy.
"We have to be careful that wage costs do not get out of line with Europe, which would increase the risk of some redundancies or less foreign investment," he said.
The Bank's head of economics, Mr Tom O'Connell, said the indigenous manufacturing sector, where profit margins are lower, could be particularly vulnerable.
In the first six months of this year, pay in the manufacturing sector accelerated by about 6 per cent, and rises in the construction sector came to around 13 per cent, compared with euro area pay rises running at only about 2.5 per cent to 3 per cent.
Dr Casey also expressed concern about the continuing rise in house prices and said there was "anecdotal evidence" that it was inhibiting the return of some workers and pushing up wage demands.
The Bank criticised the recent Budget for being "pro-cyclical", or pouring money into the economy when it least needs it.
Dr Casey said the £1 billion-plus diverted into the economy as a result of the Budget's provisions would add about three-quarters of a percentage point to growth.
"In an ideal world we would have preferred the Budget to take some of the heat out of the economy," he added. But he said the overall package should also help over the long run by making it more attractive to work and fostering moderate pay developments.
Overall, the Bank is fairly sanguine about the growth prospects for the economy. It has slightly increased its growth in Gross National Product estimate for 1998 to 8 per cent from 7.75 per cent and to 6.5 per cent for 1999.
The Bank also says the actual rate of consumer price inflation has peaked and will now fall back for some time. The rate of growth of new jobs will fall back to 3.5 per cent in 1999 from 5.5 per cent this year as female participation catches up with the EU average, and short-term unemployment falls to only 4 per cent. This will lead to an average unemployment rate of 7.75 per cent this year, falling to 6.5 per cent in 1999.
The main risk to these forecasts, according to Dr Casey, is a slowdown in foreign direct investment.