Cowen warns against wage inflation

Taoiseach-designate Brian Cowen has said that the fundamentals of the Irish economy are strong but  warned that increased wage demands by unions in the forthcoming national pay talks could act as an accelerant to inflation.

Speaking on his first visit to his constituency of Laois/Offaly since he was elected to succeed Bertie Ahern as Taoiseach, Mr Cowen said he was not worried about the slowdown in the construction sector.

However, he cautioned of the threat of what he called "second-round inflation" - where wage demands negatively impact inflation.

"It is very important that we do not have a knee-jerk reaction in terms of chasing the inflation figure by wage demands beyond the effect of putting jobs at risk", he said.

"Our response has to be such that we make sure that we do not put ourselves at a further disadvantage in terms of the response...and not do anything that worsens a situation that is challenging and secondly look to the long term in terms of securing jobs", he added.

The Tánaiste warned against "talking ourselves into recession" as he believed the fundamentals of the irish economy were "strong".

He admitted the threats faced by the economy were sizeable but said Ireland was well positioned to deal with the consequences of the international slow-down.

"The open economy cannot be immune from international developments. We’ve seen in the last six to eight months a number of adverse developments, the credit squeeze, the sub-prime market in the US, the overspill effect, the break it is having on global growth, these are affecting all our competitors and they are affecting us too."

"Thankfully, we are in a position to say that having reducted our net debt to 15 per cent of GNP, we are in a better position and the economy is in a better position than if we had a higher level of indebtedness," he added.

Mr Cowen said the record output in housing in 2006 and 2007 was proof of a strong construction sector and argued that any slack would be taken up by the National Development Plan, which is costing the State €8bn per year.

"The Government is playing its role to partially offset that reduction through its enhanced capital investment programme and I think there is a lot of investment going on in the commercial sector which is helping as well but obviously it does not totally offset the reduction in residential housing output."

His comments came after a warning by unions that the rising cost of living will have a “serious impact” on forthcoming national pay talks. Figures released yesterday showed the rate of inflation in March rose to to 5 per cent, up from 4.8 per cent the previous month.

Economic advisor to the Irish Congress of Trade Unions (Ictu), Paul Sweeney, said there was “serious concern” at the latest inflation figures and said the Republic had seen “stagnation in real wages” for those on mid-level and low pay, while remuneration for those at the top had “ballooned”.

“Irish price levels are already 21 per cent above the EU15 average for consumer services and 14 per cent above it for consumer goods price levels,” Mr Sweeney said.