Irish economic growth in 2008 forecast to fall to lowest level since 1993 when the Celtic Tiger period emerged

Irish
Irish economic growth in 2008 forecast to fall to lowest level since 1993 when the Celtic Tiger period emerged
By Finfacts Team
Mar 30, 2007, 07:07

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Dr. Alan Barratt

Economic growth in 2008 is forecast to fall to its lowest rate since 1993, according to two reports on the Irish economy.

The Economic and Social Research Institute (ESRI) says in its latest quarterly economic commentary that is published today, that economic growth will fall from 5.4% this year to less than 4% next year. In a separate report, Davy Stockbrokers forecasts that Gross National Product will expand by 3% in 2008 compared with 7.4% in 2006.

The Celtic Tiger period developed from 1993, when growth was 2.3%.

In its Spring Quarterly Economic Commentary, the ESRI also warns the Government to tackle the economy's declining competitiveness by taking action to dampen rising inflation and borrowing.

Davy Stockbrokers cut forecasts for growth this year from 5% to 4.5% following Wednesday's publication of 2006 national accounts showing that house building fell in the last quarter of 2006 for the first time since 1997.

Gross Domestic Product (GDP), the level of annual output of goods and services in the economy, will grow by 5.4% this year and by 3.9% in 2008, the Quarterly Economic Commentary forecasts.

"This slowdown in growth is driven by a slowdown in housing investment, while investment in other building and construction should continue to grow strongly, driven in part by investment under the latest National Development Plan," ESRI economist Dr Ide Kearney said on Thursday.

Both forecasts are based on a decline in house building and much slower growth in consumption once the SSIA stimulus ends. The ESRI said the huge number of vacant houses is a serious risk.

The Institute had estimated that a quarter of the additional houses built in the last four years must be vacant, but the Census showed the figure is actually 40%. It sees this as increasing the risk of a rapid fall in construction and, or, a sharp fall in house prices.

"We think prices are 10-20% overvalued, so we expect a correction," said ESRI researcher Iulia Traistaru-Siedschlag. "We expect some correction, but house prices usually go up quickly and come down slowly, so forecasts of a soft landing are justified.

"But there is an element of irrational expectations of capital gains. The possible actions of inexperienced investors who find they are not making those gains is a worry."

Dr. Ide Kearney

The ESRI's "soft landing" scenario involves a 1% fall in housing investment this year and a further 3% decline next year. Davy expects a 9% drop this year.

Such slowdowns would hit the public finances, adding €1bn to the central government deficit. Total government finances should remain in surplus, with the ESRI seeing a surplus of 1.7% of GDP next year and Davys forecasting 0.8% of GDP.

Yvonne McCarthy

The commentary contains an assessment of the sustainability of recent economic trends, in which the ESRI warns that the economy is increasingly vulnerable to housing market changes and high inflation.

"A decline in real house prices could lead to a much larger reduction in the scale of house building. The economy has been losing competitiveness since 2002. We argue that it is now imperative to halt this trend," the ESRI says.

The ESRI expects falling competitiveness will cause export growth to slow from 5.6% in 2007 to 5.2% in 2008, lower than the respective rates of import growth of 7.0 and 5.7%. "As a result, Ireland will lose market share."

ESRI'S Summary of its Quarterly Economic Commentary, Spring 2007

Dr. Alan Barrett, Dr. Ide Kearney, Yvonne McCarthy

Some of the main findings of the analysis include:

We expect 2007 to be a year of strong economic growth, with real GNP growth at 5.4 per cent, driven by very strong growth in consumer expenditure which in turn is being fuelled by the maturing of SSIA funds. In 2008, we expect growth to slow below 4 per cent as consumption growth reverts to more normal rates and as housing investment levels off.
Investment growth is expected to slow relative to recent years, with growth of 5 per cent in 2007 and 3.9 per cent in 2008. This slowdown in growth is driven by a slowdown in housing investment, while investment in other building and construction should continue to grow strongly, driven in part by investment under the latest NDP.
Growth in 2007 and 2008 will once again be driven by domestic demand. Although world trade is expected to grow by 6.4 percent and 6.2 in 2007 and 2008 respectively, we expect exports from Ireland to grow by 5.6 per cent in 2007, slowing slightly to 5.1 per cent in 2008. As a result, Ireland will continue to lose market share.
Total employment in 2006 exceeded 2 million. We expect employment growth of 3.8 per cent in 2007, slowing to 1.6 per cent in 2008. The slower rate of growth in 2008 could see the unemployment rate nudge up to 4.7 per cent. Our projections are for gross immigration flows of 72,000 in 2007 but for a lower inflow of 52,000 in 2008.

In our General Assessment of the economy, we look at the sustainability of the current boom.

The current account deficit of the balance of payments has widened rapidly since 2003 and is forecast to continue to widen out to 2008. This implies an increase in net investment inflows into Ireland. The evidence suggests that this increase in net foreign borrowing is being used to fund the very rapid growth in private sector credit financing the current boom in the housing market.
The combination of high rates of house price inflation and house completions suggest there has been strong growth in the demand for second dwellings in recent years. In these circumstances a decline in real house prices could lead to a much larger reduction in the scale of house building.
The economy has been losing competitiveness since 2002. We argue that it is now imperative to halt this trend.

Macroeconomic Adjustment in Ireland under the EMU

Iulia Traistaru-Siedschlag, ESRI.

Special Article in the Quarterly Economic Commentary, Spring 2007.

The macroeconomic performance of the Irish economy in the EMU until now has been successful, primarily due to favourable domestic supply factors and external conditions as well as the reduction of the risk premium. The resilience of the Irish economy under the EMU will be fully tested by a downturn.

This analysis identifies four main macroeconomic challenges to the Irish economy in the future:

a) maintaining a high potential growth rate
b) restoring competitiveness
c) managing potential risks to macroeconomic and financial stability from the housing market
d) adjusting to shocks originating outside the euro area

To respond to these challenges a combination of policy measures are suggested.

In the long run, productivity growth is key to maintaining a high potential output growth.
To restore competitiveness a decline in relative unit labour costs competitiveness may be required.
Fiscal measures could help to promote investment diversification and reduce the risks from over-investment in residential property.
The resilience of the economy to idiosyncratic shocks will most likely rely to a large extent on the flexibility of product and labour markets and an enabling business environment to enterprise and investment.
An effective countercyclical fiscal expansion in response to a slowdown of the economy depends on achieving a large fiscal surplus during the current boom.

DELAYED INDEFINITELY: Regulatory Reform of the Irish Bus Industry

Patrick Massey, Compecon.

Special Article in the Quarterly Economic Commentary, Spring 2007.

Compecon Director, Patrick Massey, has called for the liberalisation of the Irish bus market and an end to the Dublin Bus and Bus Eireann monopolies in respect of urban and local services in an article published in the latest ESRI Quarterly Economic Commentary. “During the past 20 years successive transport Ministers have promised to reform the bus transport market in Ireland.” According to Massey; “Bus passengers are still waiting for such reforms to be delivered.” Proposed changes announced by the current Minister for Transport last September would retain Dublin Bus’s existing monopoly and mean “that meaningful reform has been postponed yet again.”

The paper finds that the existing regulatory regime is anti-competitive and provides poor value for money for bus users and taxpayers alike. It finds evidence of significant inefficiencies in both Dublin Bus and Bus Eireann city services. It argues that existing arrangements for the payment of subsidies to Dublin Bus and Bus Eireann are inefficient and anti-competitive. It is also critical of the licensing regime and notes that Exchequer funding of new buses for both Dublin Bus and Bus Eireann may constitute an illegal State Aid. According to Massey, the proposals announced by the Minister for Transport last September fall short of what is required to bring about meaningful reform of the bus market.

The paper proposes a number of measures designed to introduce competition into the bus transport market. These include:

A full audit of all Dublin Bus and Bus Eireann services (excluding coach tour and Expressway) to identify which services are commercial and which are non-commercial public service obligation (PSO) services.
PSO routes should be put out to competitive tender with such tenders being phased in over a five year period.
The licensing scheme should be liberalised to make individual routes contestable and thus allow greater scope for competition and innovation. It is proposed that:
- The burden of proof should be reversed in respect of licence applications so that there would be a presumption that approval of applications was in the public interest with the onus being on objectors to prove otherwise.
- Automatic approval of new licence applications on non-PSO routes where entrants commit to offering lower fares and/or higher service frequencies for a minimum period of time. Such fares and frequencies would have to be maintained for a period of 2-3 years to prevent predatory behaviour.
The potential for performance based contracts, as employed in Norway and New Zealand, should be examined.

Speaking in the Dail last year in respect of the Ryanair bid for Aer Lingus, the Minister for Transport stated:
“A monopoly is bad for business. It is bad for this country, the customer, the travelling public and tourism interests.”
It is disappointing that the Minister has failed to apply the same logic to bus services.

Patrick Massey is a director of Compecon Limited, a firm specialising in economic analysis of competition, mergers and regulatory issues.
The proposals announced by the Minister in September 2006 provide for the introduction of competitive tendering in respect of “new routes” in Dublin City with Dublin Bus being allowed retain its monopoly in respect of all existing routes. Private operators will exclusively be permitted to tender for new services up to a limit of 100 buses. Any further new services will be subject to open tender.
Article 87(1) of the EC Treaty provides: “Save as otherwise provided in this Treaty, any aid granted by a Member State or through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods shall, in so far as it affects trade between Member States, be incompatible with the Common Market.”

Developments in Industrial Relations and Human Resources Management in Ireland

William K. Roche, Professor of Industrial Relations & Human Resources, School of Business, UCD

Special Article in the Quarterly Economic Commentary, Spring 2007.

Ireland’s widely articulated vision of achieving competitive advantage through the skill level of the workforce and new forms of co-operative employment relations is not borne out by developments on the ground, according to Bill Roche, Professor of Industrial Relations & Human Resources at the School of Business at UCD.

In a wide-ranging article in the Spring edition of the Quarterly Economic Commentary, Professor Roche pointed out that Ireland’s level of spending on education was among the lowest of the advanced economies, and the country ranked 17th out of 22 in the level of job-related training received by adult workers. Survey data also revealed that the proportion of the workforce employed in companies that had implemented multiple progressive practices for the management of people was below 10 per cent. The promotion of co-operative relationships in the workplace, through workplace partnership arrangements, had been one of the cornerstones of public policy over the past decade. However, progress in this area had been modest in both the private and public sectors sector, and recently some of the most radical change initiatives in the public sector appear to have seen little advantage in following the partnership model. The new Information and Consultation Act that came into force in 2006, giving employees rights to information and consultation over aspects of the operation of the businesses in which they work, seemed unlikely to change things to any significant degree.

While unions have been viewed as social partners in the running of the economy and have gained real influence in the making of public policy, they continue to experience a decline in their level of organization and density. Currently the overall level of union density stands at 35 per cent, and the level in the private sector is around 28 per cent. Such a pattern of progressively declining unionization in a buoyant labour market is unprecedented for Ireland.

Commenting on the recent Supreme Court judgement in the Ryanair case, Professor Roche wrote that the so-called ‘right-to-bargain’ procedure, which had allowed unions to negotiate pay and conditions in firms that resisted union recognition, was now under a cloud. While this procedure had assisted unions in organizing members, Professor Roche suggested that the quantitative effects of the procedure on union recruitment and organization had in fact been quite modest.