Improving productivity in Irish-owned firms can raise living standards 'substantially', says ESRI

Director of the ESRI, Professor Martina Lawless, said their new report shows that a number of 'fairly plausible external risks could have significant repercussions on the economy'.

A number of “fairly plausible” external risks could have significant repercussions on the Irish economy and one way to mitigate that is “rebalancing the composition of the economy” and supporting productivity growth of Irish-owned firms, the Economic and Social Research Institute (ESRI) has said.

In a new report, the ESRI looked at the potential future paths of the Irish economy over the next 10 years and tried to assess the potential risks associated with a number of different economic, largely external, scenarios.

The ESRI’s baseline projection for the next 10 years is an average economic growth of 2.3% of modified gross national income (GNI*) out to 2030 which will reduce down to 2.1% between 2031 and 2035.

Modified gross national income (GNI*) is a measure of the Irish economy that strips out the profits of multinationals, the impact of intellectual property that is held here, as well as aircraft leasing operations. It is one of the preferred measures of the Irish economy.

Gross domestic product (GDP) is a more common measure internationally for the strength of an economy but in Ireland, this is heavily skewed by the presence of the numerous multinationals that have significant operations here.

Multinationals

The report assumes that the global economy continues to evolve along its current pathway without any further economic shocks. One of the biggest concerns is the potential reduction in operations of the multinationals here particularly in the pharma and information and tech sectors.

In one of its scenarios, the ESRI assessed the impact of future foreign direct investment (FDI) flows declining and a gradual scaling back of activity levels among multinationals. 

The impact on GNI* would be “relatively moderate” with a 1.5% reduction by 2030, however, much of the multinational activity is not accounted for in GNI*.

Impacts on the labour market are larger with a 2.5% reduction in total employment and a 1.5% increase in the unemployment rate.

“While the immediate effect of a contraction in the foreign-dominated sector would be felt within the sector itself, its effects will ultimately be more widespread, initially channelled through labour market dynamics and finally impacting consumption and activity more generally,” the report said.

Despite the risks presented by the country’s reliance on multinationals, the ESRI said their presence “remains a tremendous positive for the Irish economy” and efforts to “retain and expand FDI must continue”.

Global slowdown

A global economic slowdown is also a potential risk as it could lead to a 5% reduction in export demand which is “projected to have a severe impact on the economy”. 

In this scenario, GNI* is projected to be 3.2% lower in 2030 compared to the baseline trajectory and the unemployment rate expected to be 3.5 percentage points higher.

Ireland's competitiveness

The last major risk scenario outlined by the report is a loss of competitiveness relative to international trading partners. 

Based on a “relative decline in Ireland’s competitiveness” the ESRI said the impact on the economy is “quite significant”. GNI* could decline by 3.1% compared to the baseline by 2030.

The ESRI also looked at a scenario on the benefits of narrowing the productivity gap between Irish and foreign-owned private sector firms.

Gradual productivity improvement starting in 2026, reaching 0.5% per annum between 2030 and 2035, within Irish-owned private sector firms will see GNI* grow 2.4% above the baseline estimate by 2035.

“There are also substantial impacts in the labour market, with total employment projected to grow by 2.3% and mean wages increasing by 1.2% compared to the baseline,” the report said. “Overall, improving productivity in the indigenous sector has the potential to raise living standards substantially.” 

Director of the ESRI, Professor Martina Lawless, said the report shows that a number of “fairly plausible external risks could have significant repercussions on the economy”, and that one of the “pretty impactful ways to address that” in terms of “rebalancing the composition of the economy" is supporting the productivity growth of the Irish-owned firms.

The report said investment in a number of areas is “critical” including support for research-oriented firms, investment in human capital through education, as well as increasing spending on public infrastructure such as housing, healthcare, and transport. “Such policies hold out the prospect of generating significant dividends for the Irish economy through several channels,” the report said.