As employment in Ireland approaches levels last witnessed in 2007, it is time to reflect on the sustainability of the country’s remarkable rebound.
Governor of the Central Bank, Philip Lane, an economist by trade, was on hand last week to acknowledge that there have indeed been great strides — and to add a few words of caution.
In a speech delivered at the Irish Institute of European Affairs, Mr Lane pointed out that the structure of our 2.2 million workforce is much more balanced than it was a decade ago when one in nine worked in construction. Today, the corresponding figure is one in 16.
Numbers gainfully employed have jumped 17% since 2012 while the average working week has also risen — from just under 35 hours to almost 37 hours.
This is happening at a time when the eurozone has for now embarked on its own recovery, with the jobless rate falling from 12% to just over 9% in 2017.
However, amid the embryonic celebrations comes the inevitable words of warning.
As the ‘governor observes, the Irish economy, small and open, is “intrinsically volatile” and tail risks are on the increase. He is an economist, remember.
And here, he points to Donald Trump’s tax reforms. The impact on multinational treasury operations is clear — the impact on productive investment not yet so evident. There are some worrying signs that investment in key sectors is on hold.
Then there is the proposed tax on digital operations, perhaps deserved but hardly welcome from an Irish perspective.
Mr Lane also cites the prospect of more protectionist measures and inevitably, there is Brexit and the impact already on the UK pound which is hitting exporters’ bottom lines.
“Any trade friction will reduce long-term living standards. Resources will have to be diverted to set up logistics. There will be extra transit costs.”
Add to that greater difficulties in accessing markets and a possible shrinkage in the availability of imported products and inputs.
The governor accepts that more public spending and lower taxes may be possible, but cautions that given our high level of debt, the stage of the cycle and the tail risks, we should be aiming for a fiscal buffer in the form of surpluses. But do the voters and their representatives possess the required maturity?
Mr Lane welcomes the National Development Plan and in particular, the fact that the increase in spending is to be gradual, reducing the risk of a crowding out of other investment as costs are bid up. In ramping up activity, it is best not to slam the foot on the accelerator.
The governor reviewed the state of Irish banking and in a hard-hitting aside, suggested that banks and their senior managers were not delivering on their promise to put the customer at the top of their priority list.
SMEs have suffered more than most from banking and other forms of neglect, and as a result Ireland has lacked the sort of regional industrial spine of the sort that has existed in western Germany since the 1950s.
Imbalances at the heart of Irish business remain a source of ongoing concern.
The chairman of the National Competitiveness Council, Peter Clinch wonders how Ireland can avoid another boom to bust cycle. He talks of the need to future-proof our competitiveness, and warns in effect that one leg of the Irish business chair is wobbly.
Indigenous firms rely on a narrow range of products and services and on a small number of export markets.
Smaller firms, which provide the bulk of the jobs , are less productive, far less likely to invest in innovation and less likely to afford the management talent needed.
Mr Clinch’s warnings are backed up in a recent ESRI publication by three EU authors, Siedschlag, Di Ubaldo and Koecklin.
They have examined productivity among Irish firms and have concluded that between 2008 and 2014 an already large productivity gap between Irish and foreign-owned firms with operations here widened, in most sectors.
In the top 10% of Irish-owned firms, productivity grew between 2008 and 2014, rising by 20% in manufacturing firms and by 10% in elite service firms.
But among the bottom 90% of Irish firms — the great majority — productivity actually fell by 5% among services firms and by 4% in the case of manufacturers.
Productivity among the top 10% of overseas-owned firm jumped by almost 40%. In the case of non-EU foreign owned manufacturers (mainly US the increase was 90%), the engine room of Irish manufacturing is dominated by a small group of largely US-owned firms.
The researchers did note that while most innovative activity is carried out by overseas based firms, the record of Irish firms is improving.
Not all innovation need be costly. Innovation extends not just to products, but also to processes, to the organisation and to the marketing activities of the firms involved.
Wages are now on the rise and the latest CIPD survey indicates that wages in SMEs last year jumped by almost 5%, having previously lagged those of larger firms.
As labour costs inevitably rise — no bad thing in itself — the pressure on owners and managers to boost productivity across a number of measures can only grow and as we all know, it is occurring at a time when many markets face the prospect of disruption.
It is imperative that state agencies, industry groups and strong firms step forward to support our domestic base through what looks set to be tricky times.
This challenge could be as great as the task the then government faced back in 2011 when it set out to rebuild the wider macro-economy.