Flabby Irish economy is not fully match fit

Flabby Irish economy is not fully match fit

By Kyran Fitzgerald

At first sight it would seem that Ireland is doing just fine if not swimmingly.

Living standards are moving ahead and the economy is approaching full employment by some measures.

Growth is now spreading more widely across the country, reducing regional imbalances in the process.

According to the World Economic Forum’s Global Competitiveness Report for 2017-2018, the country is now the 24th most competitive nation out of 137 countries.

The IMD School of Management last May concluded that Ireland was the sixth most competitive place in the world, up from 17th place in 2013.

Ireland ranks third in business efficiency, first in labour productivity, and it ranks fourth in economic performance.

The country can rest on its laurels, surely. It may not be quite world beaters, but we are getting there. Well, not quite, perhaps.

Last week, the head of business group Ibec Danny McCoy did not pull his punches: “We are burning our way through our competitiveness in a way that is more severe than during the Celtic Tiger era. It is happening in the form of wage demand pressures and in the form of rents,” he said.

It is no secret that our economic growth has been fuelled by a relatively small number of large overseas companies and that this has led to serious data distortions.

This, in turn, gave birth to the jibe of ‘Leprechaun Economics’ after a particularly spectacular surge in recorded GDP.

The latest quarterly from the Economic and Social Research Institute (ESRI) devotes much space to this topic.

The latest wage and salary data do not suggest reasons for too much concern, nor is there any evidence of a credit-driven boom.

However, the picture may not be quite so rosy if one looks under the bonnet.

The ESRI has also warned about the potential for Brexit to drive consumer prices in Ireland higher.

All the more reason to ensure that the economy is fighting fit rather than flabby.

We need to ensure that productive investment is fostered at a time when labour productivity is becoming more critical.

According to the 2018 Hays Salary Guide, four out of five firms are experiencing moderate skills shortages, but for one in five, the shortages are now “extreme”.

The recruitment firm has called on employers to make their workforces a strategic priority, saying that an acute skills shortage is set to be a key challenge.

Ibec’s director of policy and chief economist Fergal O’Brien says, “we are seeing pay increases well above average and that pay surveys may not be capturing the full weighting”.

He points to real wage growth of 2% to 2.5% over the past three to four years, though he acknowledges that housing inflation is hitting many, particularly younger earners, much harder.

Ibec will shortly publish a paper on housing affordability, in which, says Mr O’Brien, the introduction of a tax on development land banks “has a place”.

One big difference between today and the boom years is that Ireland may no longer be able to draw on a large supply of labour from eastern Europe.

Mr O’Brien said he is concerned about the fall last year for the first time since 2012 in the numbers of Irish people returning home. The high cost of living here of housing and transport, in particular, is serving to deter immigration.

He points to a doubling in office rents in key central locations as one sign of the ongoing impact on competitiveness.

“We do have (budgetary) choices we didn’t have, but we need to spend the money in the right way,” he said.

This implies targeted, carefully-controlled investment in infrastructure and a focus on tax cuts at the level where the marginal rate begins to bite.

All of which is easier said than done.

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