Chapter 1 - Economic Review and Outlook

Summary


This updated Stability Programme is framed against a prospect of strong economic growth, underpinned by a supportive international economic environment. Economic growth is expected to moderate over the forecast period, reflecting the emergence of supply-side, particularly labour, constraints. 

GNP growth in 2000 is now estimated at 8.6%, compared with a forecast of 6.3% at the time of last year's Budget.  The economy has now expanded by an average of 7.8% since 1993.  GNP growth of 7.4% is forecast for 2001 moderating to 5.1% by 2003.  Accordingly, Ireland's GNP per head should continue to converge to that of our more prosperous EU partners.

Recent and ongoing investment growth promises to support a continued expansion in exports over the period ahead.  Export growth of 11.5% is forecast for 2001.  On the basis of some limited deterioration in our relative costs, export growth is projected to slow to 8.1% by 2003.

Employment growth is expected to moderate to an average of 2.5% over the period to 2003.  Personal consumption is forecast to ease in tandem, with an average annual increase of 6.4% projected to 2003.

Inflation increased by more than expected during 2000.  The headline Consumer Price Index rose by an estimated 5.5% compared with 1.6% in 1999.  With the labour market expected to remain tight, domestic wage pressures are unlikely to diminish over the period to 2003.  However, external factors will have a reduced impact on prices next year as the effects of recent interest rate, oil price and exchange rate developments unwind.  Taking this into account, inflation is forecast to fall to 4.5% next year, and to 2.5% by 2003.

The inflation projections are based, inter alia, on the technical assumption of unchanged interest and exchange rates - and key commodity prices - from end-November, 2000 levels.

1.1 Introduction

It is estimated that average non-agricultural earnings are running 7¼% ahead of 1999.  While prices are also higher, this average increase combined with reductions in personal taxation means a substantial increase in disposable incomes for employees generally.

This document updates Ireland's Stability Programme and includes a new set of macroeconomic projections out to 2003.  It takes account of the measures adopted in Budget 2001, the new National Agreement with the social partners - the Programme for Prosperity and Fairness (PPF) - and the National Development Plan 2000-2006.

This Update has been prepared in conjunction with Budget 2001 and is being presented to Dáil Éireann on Budget Day, 6 December 2000.  As such it also provides an economic background to Budget 2001.  It has been prepared in accordance with Council Regulation 1466/97, which sets out the rules covering the content of Stability Programmes.

The Stability Programme Update is organised as follows :

·         Chapter 1 reviews recent economic performance and presents macroeconomic projections for the period 2001-2003. 

·         Chapter 2 sets out the Government's budgetary policy.

·         Chapter 3 details structural challenges facing the economy and the Government's policy responses to them.

1.2 Economic Review: 2000

 A year ago most forecasters expected the economy to slow in 2000, but it has exceeded expectations once again.  It is now estimated that real GNP will expand by 8.6%, compared with the Department of Finance's forecast of 6.3% at the time of last year's Budget.  A stronger international economy, the weak euro and more buoyant domestic demand conditions all contributed to this better performance.  The economy has now grown in GNP terms by a remarkable average of 7.8% since 1993.  

Table 1 - Economic and Budgetary Indicators: 1994-1999
  1994

1995

1996

1997

1998

1999

% Volume Change

GNP

GDP

Personal consumption

Public consumption

Fixed investment

Exports

Imports

Current Account (% GNP)

6.3

5.8

4.4

4.1

11.9

15.1

15.5

3.2

8.2

9.7

4.3

2.8

12.7

20.0

16.4

3.2

7.4

7.7

6.3

3.1

16.4

12.2

12.5

3.7

9.3

10.7

7.4

5.7

17.9

17.4

16.8

3.5

7.8

8.6

7.8

5.1

15.5

21.4

25.8

1.1

7.8

9.8

7.7

5.2

12.9

12.4

8.7

0.8

Consumer Prices (% change)

GDP Deflator (% change)

2.4

1.7

2.5

3.0

1.6

2.3

1.5

4.4

2.4

5.8

1.6

3.8

Unemployment (% labour force)

Employment (% change)

Employment ('000s)

14.1

3.6

43

12.1

4.6

57

11.5

3.8

49

9.8

4.5

62

7.4

5.7

82

5.5

6.4

97

General Govt. Balance

Deficit(-)

Surplus(+) as (% GDP)

-2.0

-2.6

-0.4

0.7

2.1

3.9[1]

General Govt. Debt (% GDP)

90.5

83.1

74.3

65.1

55.0

50.1

ESA95 Basis

Sources: CSO and Department of Finance