Falling productivity means economy set for 2008 slowdown, warns ESRI

FALLING productivity and an over dependance on construction threatens our economic growth from 2008, the Government’s think tank, the Economic and Social Research Institute (ESRI) has warned.

In its summer bulletin the institute says wages are growing faster than productivity resulting in a decline in competitiveness.

Adding to the problem is the fact that labour has also become a bigger part of the economy rising from 49.6% of GNP in 2002 to a projected 53.9% by end 2007.

Last year, productivity grew by less than 1% and wages by over 3% implying loss of competitiveness.

For strong growth to continue after 2007 requires an ongoing increase in real wages to attract more immigrants to drive the economy onwards.

However the current make up of the economic mix suggests “this trend is unsustainable,” it said.

It warns the economy could face a sharp fall in job numbers in 2008 which could signify the start of a number of years of low economic growth.

Last week Davy Stockbrokers forecast GNP growth will fall to 3% in 2008 and to 2.5% in each of the following two years.

The ESRI has not put numbers on the potential job losses or on the lower growth levels after 2007.

Given inflationary concerns it would be wrong for the Government to boost spending in the run up to the election, it also said.

The ESRI reckons that current spending next year will be 10% and not the 7% officially forecast.

Overall a smooth roll out of public spending from 2008 makes more sense, said the ESRI.

Labour Party spokesman on Enterprise, Trade and Employment Ruairi Quinn welcomed that call and said “there is every risk of damage being done to the Irish economy in the dying days of this Government.

We simply cannot have the Exchequer turned into a FF/PD war-chest.”

Despite its concerns the Institute says strong economic growth will continue in 2006 with both GNP and GDP forecasts to grow by 5.6% in 2006.

In 2007, the forecasts is for GNP growth of 5.1% and 5.2% for GDP.

Consumers will be a key source of growth over the two year period, as well as a very robust labour market, healthy incomes growth and a solid contribution from maturing SSIAs, that should add 43,000 extra jobs.

Overall, the ESRI is assuming that one third of the SSIA money or over €5 billion will be spent.

Net exports will make a negative contribution to GNP as imports continue to grow stronger than exports.

Employment will rise by 85,000 in 2006 and 74,000 in 2007 with those increases heavily reliant on immigration where gross inflows are forecast to grow by 69,000 in 2006 and 62,000 in 2007.

The ESRI is forecasting an annual rate of 3.8% for the year, suggesting a rate of over 4% for the rest of the year.

Inflation will ease next year partly because of fewer interest rate increases, it said.

However, in a further negative news, it is forecasting the key ECB interest rate will be 4% by mid next year.

It expects three increases by end 2006 of 0.25%, starting in August, followed by two more by mid 2007.