The Central Bank is optimistic that the economy is heading for the type of soft landing which the more benign forecasts have been suggesting. In its latest annual report it is predicting economic growth, as measured by Gross National Product (GDP), will slip to 6 per cent this year from 9.75 per cent in 2000. This projection is based on the assumption that the slowdown in the US will not be prolonged and that the foot-and-mouth crisis has now passed its peak.
In a welcome development, the Bank has followed the lead set by many of its European counterparts in publishing a report on the stability of the Irish financial system. The resultant conclusions suggest that the financial situation is quite favourable with no significant risks to stability evident at present. But it does point to a number of potential pitfalls in the shape of wage rises, credit growth and the emergence of asset prices, particularly the continuing increase in house prices.
In more general terms, one of the biggest problems for the Irish economy is the extreme openness which makes it "exceptionally vulnerable" to shocks from abroad. As a result, the Bank quite rightly points out that, just as we benefitted from the US boom, the economy could suffer more than the rest of our euro zone partners from any systematic weakness originating in the US. In this regard, the Bank suggests that the slowdown across the Atlantic will be shortlived - albeit sharp.
But there are domestic challenges too. These include private-sector credit growth which has increased much more sharply than GDP. Admittedly, it has been falling back somewhat in recent months and declined yesterday to the weakest level since February 1997. Mortgage lending also declined for the sixth month in a row. But the economy is also vulnerable to the rise in asset prices, particularly housing. Again the Bank points out that there has been some deceleration in the rate of increase in property prices, both residential and commercial. But it warns that a serious downturn in the economic outlook could lead to a substantial fall in the value of property.
Perhaps the key threat to the economy lies in a strong acceleration in wage rates along with a simultaneous sudden depreciation of the dollar. This would exert considerable pressure on the profit margins of firms in the traded sector of the economy. There could also be significant repercussions in terms of the ability of some borrowers to continue servicing their loans.
These fears are balanced, however, by a number of positive factors which are continuing to boost output in the economy. The European Central Bank may cut interest rates which would give a boost to consumer sentiment. Last year's Budget is also continuing to feed into the economy although the Bank yesterday called for tax rises or spending cuts to further slow growth which it regards as unsustainable - even at revised levels. The Governor, Maurice O'Connell, declined to be any more precise in this regard. The core message from Mr O'Connell and his colleagues in Dame Street is that a slowdown is on the way but that there is no evidence yet of a recession.