Dublin contests Commission growth forecasts

Date: 05/11/1998

By Tim Jones

THE Irish government has complained to the European Commission about what it claims are the institution's "over-optimistic" growth forecasts for the 'Celtic tiger'.

Finance Minister Charlie McCreevy has told Economics Commissioner Yves-Thibault de Silguy that his expectations for growth in Irish gross domestic product this year of 11.4% and 8.2% in 1999 are wildly out of line with both "common sense" and other forecasting agencies.

McCreevy believes the slow-down in the world economy caused by the crises in Asia, Russia and Latin America will keep Irish growth rates well below 9% next year.

This will be compounded by the adverse effects on business and consumer confidence of a falling-off in the republic's prodigious rate of foreign direct investment and an impending recession in the UK, Ireland's largest single trading partner.

Just 24 hours after the Commission published its autumn forecasts late last month, the International Monetary Fund predicted that Irish GDP would grow by 8.3% this year - over 3% less than De Silguy's figure - partly as a result of the impending international economic slow-down.

The Commission's optimism about Ireland's prospects has sparked suspicions in Dublin that the institution is deliberately overstating Irish economic dynamism in preparation for hard bargaining over the Union's agricultural support and regional aid budgets in the Agenda 2000 package.

"We view the Commission's forecasts as overly optimistic. Growth will be nowhere near 11.4% this year," said Lorraine Nolan, a Bank of Ireland Group economist, who predicts that it will in fact be 8.5% this year and 8.0% next.

However, Commission economists are convinced that Ireland's strong growth will be sustained by high wage settlements and private-sector credit together with a continuation of the Dublin housing price boom. House prices in the capital have soared 30% over the past year, fed by immigration, a growing population and a shortage of home stock. The boom has spread to Limerick and Galway in the west.

The impact of this and the recent weakness of the punt against the British pound has been inflation: 2.7% this year and likely to rise to 3.3% in 1999 and 2000, according to the Commission.

De Silguy has called on McCreevy to keep tight control on public spending to deal with the inflation threat since the Central Bank of Ireland will be unable to maintain its current 5%-plus interest rates when it joins the euro-zone in January next year.

The Commissioner wants the government to take extra measures to choke off house-price inflation by making home investment less attractive or improving conditions for the rented sector, as well as targeting promised tax cuts on the lower paid to reduce labour shortages.