The Central Bank says rising wages could affect the Republic's competitiveness and stresses that the Programme for Prosperity and Fairness must be adhered to. It described the slowdown in the US economy and the foot-and-mouth crisis as "a modest setback".
In its spring quarterly bulletin, released yesterday, the bank, which is responsible for regulation of the financial services sector, forecast that economic growth would slow from 9.75 per cent to between 6.5 and 7.5 per cent this year, still almost two percentage points higher than any other EU state.
The bank's assistant director-general, Dr Michael Casey, said wage inflation, expected to run at about 10 per cent this year, was a concern. "We have to be concerned about a very big hike in wages," he said. "Rising at a rate of 10 per cent, wages are growing at four times the EU average and will increase costs."
Companies in traditional sectors of the economy such as textiles and clothing will find such costs most difficult to absorb.
The bank said escalation in wages signalled that "expectations are exceeding resources" at a time when the rate of economic growth was beginning to slow. "The PPF is the bottom line," said Dr Casey. "People will just have to stick to it now that we are hitting white water." The bank is broadly optimistic about the prospects for the economy, however. "There is no reason to be downhearted," he said. "A lot of countries would kill to have a growth rate of 6 per cent. We are not talking about a recession but a modest slowing down in the Irish economy." Factoring in a US economic downturn, the bank had forecast that growth rates would slow to 7.5 per cent, mainly due to a drop in exports. The foot-and-mouth outbreak, which directly affects the agriculture and tourism sectors, has the potential to shave up to one percentage point off this.
Dr Casey said the bank would continue to monitor the impact of the disease and might be forced to tweak its forecasts, depending on the duration of restrictions and the scale of the decline in exports.
"Even if foot-and-mouth disease is not contained, the reduction in economic growth could increase to between 1 and 2 per cent, but the economy is still growing strongly in other areas," he said.
The bank agrees with the official US view that there will be "V-shaped" recovery - or sharp improvement in economic growth following a slowdown - and is optimistic the economic outlook will improve later this year.
Should the slowdown be protracted, it concedes it will have a significant effect on investment and activity in the high-technology manufacturing sectors in Ireland. It would also filter into other areas of the economy, such as the services sector.
Another potential cloud might be an appreciation in the value of the euro. Its prolonged weakness has given Ireland the most competitive advantage of all the EU states in terms of exports, and has underpinned the phenomenal growth of recent years.
But if the euro gains in value, Irish exports will become the most uncompetitive in the EU when selling in the US and UK, the bank warns.
Inflation is also a pressure point for the economy. Aside from accelerating wage inflation, the bank has highlighted hidden inflationary pressures here that are potentially greater than in other EU states.
It suggests that a degree of inflation has been suppressed in the Irish economy for many years by price controls. Many controls have been dismantled, with increases in alcohol prices, transport costs and VHI premiums having increased costs.
Full text of the Central Bank's Quarterly Bulletin for Spring 2001 is available on the Irish Times website at: www.ireland.com