The upbeat message from the Central Bank is that the economy is on the threshold of recovery, if it has not already crossed it. The reasons for optimism are twofold, according to the Bank, which has slightly increased its forecast for economic growth this year to three per cent.
The main reason is that the economies of our two largest trading partners, Europe and the United States, have turned the corner earlier than most observers - including the Bank - had expected. All the indications are that the global economic downturn will prove to have been one of the shortest on record. In addition domestic economic activity has also held up better than Dame Street's economists predicted.
The conservative nature of the Central Bank give its comments added weight. Indeed, trade figures published yesterday have already cast the Bank's new forecast in a cautious light. Both exports and imports in January are ahead of the same month last year when the economy was still growing strongly. If, as it now appears, the Republic's economy is poised for a return to growth, two questions move to the forefront of economic policy making. The first concerns the nature of the of predicted economic recovery and whether it will turn out to be sustained. The second and more significant issue is how to ensure that the sails of the Republic's economy are filled by the fair winds now forecast..
It is too early to answer the first question with any authority, but there is no particular reason for pessimism. The Central Bank said yesterday that a further pick up in growth should occur in 2003. With regard to the second question the Bank has already flagged what it believes will be the most import issue; inflation. Unless the cost of producing goods and services can be held down relative to our competitors the economy will not reap the benefits of the predicted upswing in our major export markets. The competitiveness of the Republic in this regard was one of the major drivers of the economic boom that came to such an abrupt end last year when demand in these markets dried up.
The Central Bank yesterday identified wage inflation as the most serious threat to competitiveness. It warned that both employers and employees must moderate their expectations if the economy is to prosper. The warning came on the same day as IBEC indicated it may abandon centralised wage bargaining after almost a decade and half of national wage agreements. For all their many flaws, these agreements contributed very significantly to wage moderation.
Although there is a whiff of sabre rattling about the noises emanating from IBEC, there can be no doubt a successor to the current agreement - the Programme for Prosperity and Fairness - will be more difficult to negotiate than any of its predecessors. Talks are due to start in the autumn and the issue will dominate the early economic agenda of the next government. If the Central Bank is correct in its view that wage inflation is about to become the economy's Achilles heel then it is something that the incoming administration cannot afford to get wrong.