Rising costs threatening recovery, NCC report finds

Ongoing increases in domestic costs — such as wages, utility prices, property and business services — pose a large threat to the country’s sustainable recovery, the National Competitiveness Council (NCC) has warned.

In its ‘Costs of Doing Business in Ireland 2016’ report, the Council said that while Ireland may not be able to control many external issues that may affect its economic wellbeing, the country must act to enhance its competitiveness in areas where it does have control, namely the domestic economy.

“The recent appreciation of the euro vis-a-vis sterling provides a timely warning about just how vulnerable Irish firms are to external shocks.

"The appreciation of the euro has placed Irish exporters under increased cost competitiveness pressure.

"This reinforces the importance of prioritising policies and actions that are within Ireland’s control to enhance cost competitiveness,” said NCC chairman Professor Peter Clinch at yesterday’s report launch.

In its report, the NCC said that while wage increase demands are understandable after periods of recession, Irish labour costs have grown more quickly than in the wider eurozone in the past two years and if that trend continues Ireland’s competitiveness could be damaged.

Wage growth should not outpace productivity growth, the NCC said, and attention needs to be paid to “a broad range of costs in an effort to promote a virtuous circle encompassing the costs of living, wage expectations, productivity and cost competitiveness,” it said.

It also noted that business services costs have been on the rise since 2010, making Ireland an expensive location in which to do business, with a price profile which can be described as “high cost, rising slowly”.

High business costs, the NCC warned, could make Ireland less attractive for foreign direct investment and can reduce the competitiveness of Irish enterprises’ goods and services trading both domestically and overseas.

The report highlighted skills shortages, industrial unrest and infrastructure bottlenecks as key short and medium-term risks.

It also pointed to higher than average interest rates being charged on business loans and rises in commercial and residential property costs.

A decline in vacant commercial property space could also result in rent increases and impact competitiveness.

“There is a role for both the public and private sectors, alike, to manage proactively the controllable portion of their respective cost bases, drive efficiency and continue to take action to address unnecessarily high costs.

"Such actions will ensure that improvements in relative cost competitiveness are more sustainable, leaving Ireland better positioned to cope with external shocks,” Prof Clinch said.

“In terms of costs, the cost base for enterprise has improved across a range of metrics since 2009 — the cost of starting a business, communications costs and average income taxes.

Ireland, however, remains a relatively high cost location and, already, the return to growth has resulted in a series of upward cost pressures,” he added.

“In recent months we have seen the challenges created for Irish firms exporting to the UK, resulting from the weakness of sterling on international currency markets.

"Such external developments reinforce the need to pursue policies to enhance Irish cost competitiveness.”