Subject to all the usual cautions, this week's Economic and Social Research Institute's Quarterly Economic Commentary predicts a soft landing for the Irish economic boom. The figures suggest that inflation will reach a temporary 3.5 per cent peak towards the end of this year, but will drop to about 2 per cent by the end of 1999.
The growth of GNP is projected to fall back from an estimated 6.75 per cent in the current year to 5.5 per cent next year, "bringing the economy back to a sustainable long-term growth rate under the conditions of EMU". This moderation of our very high (7.5 per cent) annual growth rate from 1994 to 1997 would have been secured by what the commentary describes as "a gradual controlled loss of competitiveness", consequential upon "the anticipated depreciation of sterling from its currently grossly overvalued exchange rate against the euro currencies".
But the ESRI warns that "it would be collective folly to accentuate the coming loss of competitiveness, through a significant rise in the rate of wage inflation".
The scenario painted of inflationary pressures may be too optimistic. For one thing, the ESRI forecast of retail sales for the rest of the year seems much too modest. Despite the volume of retail sales in the first five months of the year running at a phenomenal 10.25 per cent above last year's level, the commentary assumes that the increase in retail sales will be only 7.8 per cent for the whole year.
It justifies this by reference to the brief, artificial boost to retail sales at the end of last year of seasonally abnormal car sales as before the scrappage scheme ended. In the last quarter of 1997 new car sales were at twice the previous year's level, and in the final quarter of the present year this must, of course, temporarily affect the ratio of 1998 to 1997 retail sales.
But the ESRI projection for retail sales in the second half seems to over-adjust for this factor. Its arithmetic implies that retail sales, which seasonally adjusted rose by a remarkable 7.75 per cent in the eight months to May, will decline slightly in absolute terms in the second half of this year. But nothing in the economy - or in the commentary - justifies this.
This means that its projection of a 7.4 per cent increase in overall personal consumption this year is likely to prove too low - and this has possible implications for the level of GNP, for domestic production of goods and services, and for imports and the balance of payments.
The ESRI may also have underestimated the continuing inflationary pressure deriving from the housing market in some major urban areas. While in rural areas and small towns it may be true that "the rate of new house-building must be reaching the point where it will at least match the underlying rate of demand" this is unlikely, because of the shortage of serviced land, to be the case in Dublin or, possibly, in other major urban centres.
The commentary may also underestimate the stimulative impact of lower shortterm interest rates in 1999. Even if "there will be a modest rise in continental shortterm interest rates before the end of 1998", the initial drop in Irish rates at that time would still be very substantial. And this could accelerate the rise in personal consumption, which the commentary has optimistically assumed will fall next year below the ESRI's already under-estimated 7.4 per cent figure for the current year.
But, as the Irish Times business supplement reported yesterday, the loss of momentum in the German economy in the second quarter has recently created doubts about the raising of the present German short-term interest rate of 3.3 to 4 per cent as the euro is launched. And, if the rate is not raised, there would be a much larger end-year drop in our interest rates than the ESRI has assumed for its projections.
These considerations do not mean that the inflation rate next year will necessarily be higher than the 2.4 per cent figure projected by the ESRI. But there is clearly some danger that, even if supplementary public service pay increases are avoided, the emergence of an element of domestic inflation could at least partially offset the anti-inflationary effect of the expected fall in the value of sterling during the next 12 months.
However that may be, and despite the Taoiseach's recent constructive intervention in relation to pay issues, the institute is right to say that the main danger facing us now is an episode of "collective folly" involving an acceleration in the rate of increase in pay on a scale which, with the expected drop in the value of sterling, could weaken our competitiveness in a manner that would be neither "gradual" nor "controlled".
Even if new public sector pay demands do not spark off excessive claims in the private sector, and even if the Government risks relieving the tax burden on the lower and middle income groups in December's Budget, it will still not be easy to secure moderate pay increases in next year's pay negotiation.
Given that under recent national agreements almost half of the modest real increase in the living standards of workers has derived from tax cuts, workers have become increasingly restive about what they see as excessive pay moderation. Even amongst the 400,000 individuals who have entered the work-force in the past five years there is little understanding of the extent to which recent moderate pay increases have contributed to this huge upsurge in employment and decline of one-third in unemployment.
Another factor has been the widespread preoccupation of many public service workers with changes in relativities, which for many of them almost seem to loom larger than the actual purchasing power of their wages or salaries.
While this has been mainly a public service preoccupation, there has also been growing dissatisfaction amongst private sector workers with the extent to which their remuneration has fallen behind that of workers lucky enough to work in the sheltered public sector. Negotiated pay increases in the public service are often bolstered by automatic annual increments, and pensions are pay-related, rising faster than inflation, which is often not the case in the private sector.
It is sometimes claimed that higher public service pay increases simply involve catching up on ground lost earlier. But the truth is that in the past decade public service pay has never lost significant ground vis-a-vis the private sector, and any minor setbacks have been quite temporary.
As the attached table shows, between March 1988 (when the statistical series for public service pay was initiated) and September last year (the latest period for which such figures are available), the margin by which average public service earnings have exceeded average earnings in manufacturing has risen by well over half, from 33 to 51 per cent. This has mostly resulted from two major spurts in public service pay growth, in 1989-91 and again in 1995-97.
It is difficult to see how such a persistently growing public/private sector disparity can be justified. And it is certainly hard to believe that labour productivity in the public sector has risen during this period by anything like the average 140 per cent increase recorded in manufacturing between March 1988 and September 1997.
Some would question whether in view of the slower growth of productivity in the public sector, pay there should even rise as rapidly as in the private sector. But a case can be made for the benefits of private sector productivity being shared with those who in the public sector - civil servants, local officials, gardai, soldiers, teachers - provide the environment and infrastructure in which business can flourish.
But as a public service pensioner benefiting from the present system, I have to admit that I would find it impossible to persuade a private sector worker that those of us who are in, or who draw pensions from, the sheltered public sector should consistently do so much better than private sector workers, by virtue of operating a self-serving system of relativity claims between different public sector groups.
I have to agree with the authors of the ESRI commentary that the government "in concert with the trade union leadership . . . must explain that long-term changes in relativities between different groups are an inevitable consequence of the introduction of productivity bargaining" and that, "The government must convince its employees, in spite of some evidence in the recent past, that it has the will to resist sectional pressure in the future, and will, if necessary, withstand the threat or actuality of industrial action".
Margin by which average Public Service earnings exceed average earnings in manufacturing:
March 1988 - 32.9%
September 1989 - 31.6%
September 1991 43.5%
March 1995 - 43.1%
September 1997 - 51.1%