Economic growth is set to accelerate next year, fuelled by recent tax cuts in the Budget, the Central Bank has said. It warns, however, that greater vigilance will be needed from policy makers to prevent the economy overheating.
Some symptoms of overheating have already appeared, the Bank says, including the rapid growth in borrowing, the tight jobs market and sharply rising house prices.
The Budget could add as much as 1 per cent to economic growth next year and would also contribute to a rise in the inflation rate to 2.5 per cent, the Bank said yesterday.
The Central Bank's assistant director general, Dr Michael Casey, said it would have preferred the Government to opt for a more sustainable, if slightly lower growth rate, rather than going for "everything today".
He noted, however, that the Bank recognised Budget tax concessions were part of the agreement with the social partners.
At the same time, Dr Casey sounded a warning that interest rates might not fall as quickly as expected in the new year.
He believed the Bank should do nothing to lead the markets towards lowering interest rates.
Speaking at the launch of the bulletin, Dr Casey said the Bank now expected growth in gross national product to be 7.75 per cent next year - one percentage point higher than its bulletin forecast, which was produced before the Budget.
Growth this year is estimated at 7.5 per cent. Dr Casey also warned that inflation would pick up next year, rising to nearly 2.5 per cent, from 1.5 per cent this year.
The Bank, routinely cautious in such matters, also warned that the economy could not continue to grow at its current rate.
It says the economy's ability to continue growing at these rates depended not only on demand but also on supply conditions.
It added that while these had remained favourable up to now, there were signs of increasing skill shortages and continuing pressure on economic infrastructure.
Dr Casey was hopeful of a "soft landing" or a decline in the economic growth rate to 4 or 5 per cent when the economy began to slow down.
"This is still double the figures achievable in most EU countries," he noted.
The Bank expects continuing good news on unemployment, with the rate expected to decline from just over 10 per cent in 1997 to 9.5 per cent next year. The Bank also sounded warnings on the growth in house prices and the continuing strong demand for credit.