From Annual Competitiveness Report 2006, Volume 1: Benchmarking Ireland's Performance

The Irish Central Bank this week urged the Government to maintain robust public finances so that they can be used as a "buffer" in the event of a significant slowdown in the economy.

A "sharper than expected" decline in the housing sector and loss of competitiveness remained "vulnerabilities" for the economy, the bank said in its Annual Report for 2006, while a weakening dollar and high oil prices were also upside risks.

However, the bank stressed that the outlook for the next two years remained positive, with the economy still on track to grow by 5 per cent this year and 4 per cent in 2008; growth rates which compare well with other economies.

While Central Bank Governor John Hurley said that the housing market is most likely to make a soft landing, a more dramatic fall in house building "cannot be completely ruled out", he said.

The Central Bank's projected growth rate for next year is at about 4.0%.

The Economic and Social Research Institute said earlier this month that Gross Domestic Product (GDP) growth will slow to 4.9% this year and fall to 3.7% in 2008.

Dan McLaughlin of Bank of Ireland expects growth of 5% in 2008. McLaughlin said this week that even if the consensus turned out to be right it would "hardly be disastrous" for the economy, which had been "almost like a model economy" over the past five years.

Ulster Bank said on Friday that despite a feeling that "the economy is going down the tubes", the opposite is the case, and it expects strong economic growth this year and in 2008.

However, the bank expects 30,000 jobs will be lost in the construction sector over the next two to three years as the economy slows.

And its latest economic analysis says the slowdown in the building sector will add to unemployment, with the result that the jobless rate could reach 5.0% by the end of next year from a current level of 4.1%.

Being right or wrong with forecasts on growth, interest rates and house prices in the short-term, are no big deal. Besides, the margin of error is seldom huge and anyway, who is going to remember?

What is important is that there is no one who understands economics, expecting a crash or meltdown in the current year or next.

When Taoiseach Bertie Ahern expressed surprise on July 4th that "cribbing and moaning" critics of the Irish economy and Government policy "don't commit suicide," he was reinforcing criticism from a number of  economists and property interests that some economic commentators were "talking down" the economy.

It is striking how much the critics of the perceived gloomy economic commentators, are focused on the here-and-now, while the latter generally are looking ahead to the medium to long-term.

While striking, the dichotomy isn't surprising.

Many economists simply cannot expound about the future - for example criticise a Government policy or the lack of one or risk alienating a sector of the population, or present a scenario that may be contrary to the commercial interests of their employers.

Besides, Governments do not also like to have too much focus on the future as it may raise questions about the prevailing direction of the economy.

Looking to the Future

Economic trends have long gestation periods and the Celtic Tiger did not arrive as manna from heaven in the 1990's.

So what is the vision of the Irish economy beyond two general election cycles?

The Government plans to spend €3.8 billion on Research & Development by 2013, as part of the National Development Plan.

The target is to be a world-class knowledge economy.

The Inconvenient Truth is that the tradable goods/services sector of the Irish Economy is more dependent on American firms than it was at the emergence of the Celtic Tiger.

So the world-class knowledge economy goal will likely help promote the maintenance of US design centres or the attraction of some new ones, but as the process of the move of manufacturing to the East accelerates, to believe that Ireland will be able to maintain a huge number of what Micheál Martin, Minister for Enterprise, Trade and Employment, terms "high calibre jobs," is a pipedream.

In early 1998, there were 126,100 employed in the Irish construction sector. In December 2006, there were 282,000 - about 38,000 of them were migrants. How many will be employed in 2017 - post the infrastructure/housing boom?

Even allowing for that great crutch - demographics - 180,000? 160,000?

The non-commercial public service has added about 80,000 jobs since 1997.

Just consider a few pertinent facts that have been covered in recent times in related articles:

• The Irish workforce expanded by 430,000 in the period 2000/2006, but the number employed in the exportable goods/services sector fell by 11,000 to 305,000 - - down from 19% of the total workforce compared with 14.5% in 2006.
• Shane Ross reported in The Sunday Independent (15/07/2007) in advance of the publication of the Enterprise Ireland State jobs promotion agency's 2006 Annual Report, that in a year when 86,000 jobs were created, only 1,261 were created in agency supported firms. Finfacts previously reported that only 6,000 of the 86,000 jobs were created in the exportable goods/services sector, including half the addition, in foreign-owned firms. The strong growth in Construction (+28,400) and the Health (+18,700) accounted for 55% of the increase.
• Ross also reported that €8 million was spent by Enterprise Ireland on a voluntary redundancy programme.
• Professor Hans-Werner Sinn, President of the German Ifo Institute, recently said that if the forecasts are correct, in 2007 the international economy will grow by 5.0% for the fourth time in succession. This has not happened since the beginning of the records in 1950s. However, against that backdrop, the annual rise in the value of exports, in US dollar terms in 2006 for Ireland of 3%, was the lowest increase of the world's top 30 exporters and compared with a rise of 15% for the global number 1 - Germany.
• Between 1995 and 2001 Irish merchandise exports grew by over 250%, but between 2002 and 2006 they fell by 6%.
• Irish-owned exporters are responsible for less than 10% of global exports from Ireland and the principal market remains the UK.
• While Irish trade figures to booming Asia may flatter, they reflect multinational company supply decisions. Irish firms are almost invisible in the region.
• The globalisation of the commercial property market coupled with the halving of the Irish capital gains tax rate to 20%, has made overseas investment property the investment of choice for the wealth generated by Ireland's boom.
• Irish Venture Capital investment in 2006 was €192 million - equivalent to 2.4% of 2006 investment in overseas commercial property In the first half of 2007, Irish tech companies raised €62.6 million in venture capital. In the same period, commercial property firm Jones Lang LaSalle reported that more than €3 billion was invested by the Irish, in UK commercial property - and that is just in respect of the UK.
• No Irish tech company has revenues above $100 million.
• The Irish operations of one of Ireland's top food companies, Greencore, are now dominated by two big property projects.
• The emerging trends in global manufacturing, are exemplified by Apple's iPod, which comprises both parts that were all manufactured in Asia and Asian assembly, and Boeing's new Dreamliner aircraft that has transformed the US company into a systems integrator rather than manufacturer.

Some of the rents from the continued high profile role of overseas commercial property investment, will flow back to Ireland but in the key export sector, we simply are not prepared for a likely contraction in employment in the foreign-owned sector in a decade ahead, as the construction sector output falls into line with other developed countries.