Irish
Senior European economists warn that Irish economy is at risk of serious slowdown
By Michael Hennigan, Editor and Founder of Finfacts
Feb 25, 2007, 18:59

Chart from the Ifo World Economic Climate Indicator that was published on Feb 20, 2007 - - - The CESifo Group, consisting of the Center for Economic Studies (CES), the Ifo Institute for Economic Research and the CESifo GmbH (Munich Society for the Promotion of Economic Research) is a research group unique in Europe in the area of economic research. It combines the theoretically oriented economic research of the university with the empirical work of a leading Economic research institute and places this combination in an international environment. The services of the CESifo Group range from internationally established service products, such as the Ifo Business Climate Index, to internationally acclaimed research, the promotion of junior researchers and the numerous, widely publicised contributions to policy debate at the national and European levels. CESifo is also the core of a research network consisting of former visiting researchers at CES, which now numbers over 500 economists from many countries. CESifo is also the trade name under which the international activities of Ifo, CES and CESifo GmbH are bundled. The CESifo group was established in 1999, when Prof. Hans-Werner Sinn was appointed president of the Ifo Institute jointly by the Ludwig Maximilian University (LMU) and the Ifo Institute and CESifo GmbH was established as a subsidiary by the LMU and the Ifo Institute. By grouping its joint resources, an international orientation and an aspiration to excellence in all fields of activity, the CESifo Group has achieved its initial goal: to make Munich a centre of economic research and policy discussion in Europe.

On Tuesday, the European Economic Advisory Group at CESifo, the Munich-based Centre for Economic Research, will present its sixth report: Report on the European Economy 2007 at a press conference in Brussels and at press conferences in major European cities.

EEAG’s 2007 Report provides a comprehensive forecast for the European economy for the coming year, with a special section on Eastern European countries. In addition, it addresses several important policy issues, including an in-depth examination of whether the features of the Scandinavian model can be regarded as the fundamental underpinning for the Nordic countries’ excellent economic performance in recent years.

Tax competition, in particular the causes for diminishing tax rates in Europe and their implications for public policy, are also analysed in detail, while a further section makes a critical scrutiny of many governments’ penchant for “economic nationalism” and its consequences for efficiency and growth. Lastly, macroeconomic adjustment scenarios for some European countries are explored exhaustively.

Irish Economy

The CESifo group of senior European economists, are reported to say in the report, that the Irish economy is at risk of an imminent and ‘‘very serious’’ slowdown due to high wages, an overdependence on construction and a potential collapse in consumer spending.

The economists warn of a clear risk of ‘‘a significant reversal’’ in construction activity.

Combined with the impact on exports from declining competitiveness, this could lead to a sharp fall in growth rates, it says.

Last week, the CSO reported that Irish exports rose by 2% in 2006, compared with a 13.9% in German exports. Both Irish and UK exporters were affected by the rise in the euro against the US dollar in their principal market areas - the US and Asia.

"This is a very good performance by Irish exporters in a difficult trading environment caused by the continuing global economic slowdown and rising oil prices," the Michael Ahern, Junior Minister for Commerce bizarrely said.

In contrast with the impression of the Department, the world economy is in the midst of a sustained economic boom!

The CESifo report on Ireland warns that a property downturn could put pressure on public finances, as tax receipts fall at the same time as demand for social welfare payments increases among unemployed construction workers.

The problems facing the Irish labour force in such a scenario could only be corrected by a significant number of recent immigrants choosing to leave the country, and job creation in sectors not connected to the construction industry, the group said.

‘‘Such a slowdown would also raise the demand for public support of unemployed foreign workers, putting pressure on the Irish welfare state,” the report said.

While inward migration had helped to keep wage pressures down, especially among low-skilled workers, they had also contributed to the continuation of the boom in the construction sector.

‘‘In Ireland, the demand for new housing by migrants is one of the factors contributing to the strong dynamics of the real estate market, hence to the prolonged boom in the construction sector,” said the group. But that boom was close to fading away, the report said.

‘‘The strong rate of expansion and the high market valuation of the housing stock point to the risk of a significant reversal at some point in the near future,” it said.

The report warns that prices of goods, services and labour had risen too quickly, putting Ireland at the top of the EU table for labour costs, and that the economy was particularly vulnerable to a fall-off in global demand for Irish exports.

This exposure, combined with the risk of a property slowdown, means that there is ‘‘substantial macroeconomic risk built into the current state of the Irish economy’’.

The economists warn that the boom could turn into a period of slow growth, as falling consumer demand and a decline in construction activity coincide with difficulty in export markets due to declining competitiveness.