Wages ‘must fall’ by a further 10%

WAGES and prices need to fall by a further 10% to make the economy more competitive but even with these cuts the unemployment rate will hover between 7% and 8%, according to Bloxham Stockbrokers.

The company’s chief economist, Alan McQuaid, also expects house prices to fall by 10% on average this year.

“Prices/wages need to adjust further downward to make the economy more competitive. Another 10% fall is required in our view,” he said.

Mr McQuaid also said he believes the jobless rate is close to peaking at around 13.5%

“The natural rate of unemployment in the coming years will be significantly higher than during the Celtic Tiger era, at 7%-8%, due to the high level of unskilled workers in the economy. The labour market will be the last piece of the jigsaw in the Irish recovery story. It will be the end of this year, at least, before there is an underlying improvement in the employment situation,” he added.

Mr McQuaid also said that a number of indicators (PMI data, retail sales, Dublin Port figures) point to quicker economic recovery than earlier thought.

“Following a record contraction in GDP of 7.1% in real terms in 2009, we are now expecting an average increase (albeit modest) this year of 0.5% compared with our previous projection back in March of a contraction of 0.75%,” he added.

Bloxhams also believe the fall in the euro in the year to date is very encouraging for Irish exporters.

“Ireland benefits more than the other Euroland countries from euro weakness against the dollar and sterling. We continue to look for a stronger dollar ($1.10 by year-end) and sterling (£0.80 by year-end) in the coming months.

“A strong British pound will in particular boost Irish ‘indigenous’ exports. Ireland will gain too from the fact that it has a higher percentage of its exports in services (47%) than any other western economy,” he said.

He believes the export sector will lead the economic recovery.

“The building sector will remain a drag on economic growth for some time to come. House completions this year and next set to be in the 10,000-15,000 range, mostly one-off units, and well off the peak of 93,000 back in 2006 at the height of the construction boom,” he said.

Mr McQuaid said the privatisation issue should be on the agenda for political debate as a means of funding the exchequer.

“However, there is a lot to be said for the trade union view that fiscal correction, not just in Ireland, but in Euroland as a whole, takes place over a longer time-span, 10 years rather than the 3-4 years being suggested by the European Commission at present.”