The economy has weakened substantially and employment is under threat due to competitive pressures. This was the central message from this week's Central Bank quarterly bulletin, supported by trade figures published yesterday. Apart from the pharmaceutical/chemical sector, the rest of industry is contracting and the weak international outlook does not indicate an early upturn.
Part of the reason for the current economic uncertainty is, of course, the war in Iraq. As the International Monetary Fund warned yesterday, a lengthy war could undermine hopes of a global recovery. Hopes of growth in the Irish economy are based on just such a global upturn later this year and clearly this cannot now be guaranteed.
Against this background, the job of Irish policymakers is to do all in their power to build the competitiveness of the economy - to try to minimise the impact of the current difficult period and position the economy to benefit when the international upturn takes hold. This is no easy task, with the economy still losing price competitiveness as the rate of inflation runs ahead of our trading partners.
Inflation is starting to fall and the Government must do all in its power to underpin this trend. A committee has been set up under the new partnership programme to monitor and advise on inflation and this exercise must be given the priority it deserves.
In the short term, a serious commitment is needed to hold steady the range of charges from various parts of the public sector, which is one of the factors driving up inflation. The Government also needs to start thinking now about how it will balance its 2004 Budget without further sharp increases in excise duties and indirect tax. Tax rises are adding more than one percentage point to the 2003 inflation rate - and considerably more when the rise in other public sector charges is counted in.
At the heart of the required policy approach must be a drive to break the psychology which has led inflation rates of 4 to 5 per cent to appear "normal." Part of this will be achieved by promoting competition policy, which is one of the best ways to hold down inflation in the long term. The Central Bank's drive to contain mortgage lending can also play a role; while house prices are not directly counted in the consumer price index, the rising cost of housing has been one factor pushing up wage demands and underpinning an inflationary psychology.
Bringing down inflation must now be the top economic priority. Otherwise the economy is vulnerable to a sharp rise in unemployment if the international recovery does not transpire, or if the euro rises further on the currency markets.