Unemployment is set to rise sharply over the next 18 months as the economy continues to fall short of its potential growth rate, the Economic and Social Research Institute (ESRI) has warned.
The organisation has also called on the Government to speed up reform to introduce competition in sectors of the economy where inflation has been most ingrained.
The ESRI has cut its growth forecasts for this year and next on the basis of the rising euro and a poor international trading environment. It has revised down its Gross Domestic Product (GDP) forecast for 2003 from 3 per cent to 2.6 per cent and cut its Gross National Product (GNP) outlook from 2.5 per cent to 2.4 per cent.
For 2004, it is expecting GDP of 3.1 per cent and GNP of 2.9 per cent, with a prediction that both will trend upwards from 2005.
"This is the Irish economy in a downturn," said ESRI economist Mr Danny McCoy, identifying a declining inflation rate, a deterioration in the public finances and a rise in unemployment as classic signs of an "underachieving" economy.
In its latest quarterly commentary, published today, the ESRI is forecasting that the unemployment rate will average at 5 per cent this year before registering a "very steep rise" to 5.7 per cent in 2004. Wage expectations are also diminishing, according to the commentary.
The ESRI expects that inflation will move down towards 2 per cent at the end of next year but warns that average price growth will still outpace that of most of the Republic's main trading partners.
The Government must put greater resources into competition policy and regulatory reform if it wants to guarantee the Republic's competitiveness, it says. The think-tank argues that competition policy must be stepped up in sheltered parts of the economy, such as the professions and the services sector.
The call comes just days after the Tánaiste, Ms Harney, said improving competitiveness in the traded sector would be a central focus in next December's budget.
The euro's continued strength means the case for a speedier implementation of competition policy has "never been more compelling", the ESRI contends.
Mr McCoy said the Government should provide more funding for the Competition Authority so it can pursue simultaneous reform in a number of sheltered sectors, rather than addressing them on a sequential basis. He acknowledged that the authority has been moving with great pace but said more progress will be needed if the Republic is to achieve the level of competitiveness required by an export-oriented economy facing currency pressures.
The commentary warns of further pressure on indigenous firms over the coming year, predicting that the euro will rise to $1.20 against the dollar as interest rates trend upward and make borrowing more expensive.
The ESRI's figures offer further proof that the Government faces even tougher choices as it prepares the 2004 budget, said Fine Gael's finance spokesman, Mr Richard Bruton, last night. Although the ESRI had adopted a "cautious approach", it had highlighted the Government's failure to tackle over-pricing by Irish service companies and professionals, Mr Bruton said.
Meanwhile, the Labour Party's finance spokeswoman, Ms Joan Burton, said the ESRI commentary had illustrated the failure of the Government's budgetary strategy.
In particular, she agreed with the ESRI's warning that small Irish exporters could be further hit by a weakening of sterling in the coming months.
She again urged the Government to borrow for "prudent, strategic" infrastructure, particularly since such projects can currently be completed at relatively low prices.