Growth comes at a price

A left-of-centre economist in the United States has a certain disdain for what he calls “up and down economics”, but for those forced to live in the real world that phenomenon doesn’t exist.

Most prices, measured by the rate of inflation, have a nasty tendency of rising, all up and no down, so to speak. In this country, the inflation rate has been running at well over twice the EU rate and only in recent months has the gap begun to close in earnest. Inflation in November 2002 stood at 4.8% against an annual inflation rate of 2.2% for the year to end November 2003. That’s quite a reversal of fortunes and the chances are that by the end of December the rate will be close to 2%.

Several factors are at play here including a rise in the euro against the dollar and the economic slowdown, which has taken some of the heat out of consumer demand over the past 18 months.

From October to November the monthly rate of inflation was flat with gains across health, education, footwear and health, offset by a fall in the cost of motor insurance, accommodation charges and airfares.

Looking ahead, the first six months of 2004 appear pretty benign with price rises at or around 2% for the first half of the year. Thereafter, the consensus is that economic recovery in the US and Europe will start to impact on prices. Overall, such a level of price pressure would not materially impact on household spending activities or cut across business investment policy in the coming year.

In the context of an economy starting to pick up, those are significant factors which should result in reasonable economic growth in 2004, Mr Hughes says. He also believes Austin Hughes, chief economist, IIB Bank, believes that by the year end inflation will be heading back up to 3%. That should give an average inflation rate for 2004 of 2.6% that next year consumers will be distracted by local, government and other charges.

If they go up again by 25% next year while other public sector costs are also hit then perceptions of a rising inflation rate could become widespread”.

Friends First economist Jim Power says inflation is yesterday’s story and we have moved a long way from early 2001 when the figure was 5.5% and threatening to go higher.

At the time, economists such as Dr Dan McLaughlin of Bank of Ireland Group Treasury consistently argued that high inflation was part of the dynamic economy creating strong growth. He said the situation would resolve itself as the economy settled back to more normal growth Since entering the eurozone, we are restrained from spending excesses that caused huge pressures in the past. With interest rate policy in the hands of the European Central Bank we are also subjected to further constraints, which keeps the lid on inflation across the EU. Alan McQuaid of Bloxham Stockbrokers believes we have paid a high price for our track record on inflation over the past few years. He believes severe damage has been done to the economy, which will impede progress in the coming years. “In a damning indictment of Ireland’s loss of competitiveness, the World Economic Forum’s Global Competitiveness Report 2003-2004 now ranks Ireland at 30 in its overall league table, down from 23 last year; 11 in 2001 and 4th in 2000,” he says.

“There have been many independent reports in the last few months highlighting our inflation/ competitiveness problems. The latest, from the national competitiveness council (NCC) in the first week of December, warned the Government to avoid inflation-fuelling increases in customs and excise duties; VAT and publicly administered prices in the Budget.”

Mr McQuaid says the NCC benchmarked Ireland against 15 other countries out of 128 competitive indicators and we were found wanting in several key aspects. Despite that, Finance Minister Charlie McCreevy has continued to pile on indirect taxes on cigarettes and petrol while stealth taxes across a range of services from VHI to hospital charges and motor tax were all introduced in November before the Budget.

Mr McQuaid says while the inflation battle has been won, we may have lost the competitiveness war. And the consequences of that could be long term as several independent bodies, including the Central Bank of Ireland, have pointed out.