The economy will slow next year, unemployment levels will grow dramatically and inflation will rise to problematic levels, the Economic and Social Research Institute (ESRI) has said in its latest economic commentary.
The Government-sponsored think tank also expects the public finances to deteriorate in 2003, leaving them close to the edge of the "safety margin" set by the European Commission. This would mean the State could breach the rules governing economic and monetary union in the event of a severe downturn.
The ESRI has revised its Irish growth forecasts for both this year and next on the basis of an uncertain international outlook and the "contractionary" impact of the recent Budget.
The domestic economy is now estimated to have grown by 4.3 per cent in GDP terms in 2002 and by 2.2 per cent when measured in GNP. This compares to the ESRI's previous estimates of 4 per cent for GDP and 2.5 per cent for GNP.
For next year, the institute has reduced its expectations for GDP growth from 4.2 to 3.8 per cent. For GNP, which it notes is a better measure for judging the State's likely tax revenues, it has cut predictions from 3.3 to 3 per cent.
Much of this growth will come in the second half of the year as the international recovery progresses, according to the commentary.
The ESRI's downward revisions for 2003 come a day after after the Central Bank downgraded its GNP forecast from 4.25 to 3 per cent, again citing weak prospects for the international economy.
Coupled with the lower growth forecasts, the ESRI has also raised projections for unemployment and inflation, pointing out that 2003 will be the first year in two decades when both indicators would rise simultaneously.
The think tank predicts that inflation will average 5.1 per cent next year, damaging the State's competitiveness after unemployment hit a high of 5.5 per cent this year, before falling back to an average of 5.2 per cent for the year.
The Central Bank has also raised concerns about the further erosion of Ireland's competitiveness by stubbornly high inflation.
The warnings come as fresh data from the ESRI and Permanent TSB revealed that housing inflation could escalate to 13 per cent by the end of the year.
In such an environment, it is "not desirable" for a new partnership agreement to follow precedents whereby wages are settled without regard to future economic conditions, the ESRI's Mr Danny McCoy told journalists yesterday.
Mr McCoy dismissed suggestions that a replacement agreement could run for a shorter period than in the past as "just dancing around the edges" of the problem.
