The reduction in labour costs in Ireland has been described as “remarkable” by the European economics commissioner Olli Rehn, who said further falls were expected this year and next.
The European Commission’s spring economic forecast downgraded Ireland’s growth expectations this year and in 2013 to lower than the Government’s latest adjusted expectations. This year they expect growth of 0.5%, compared with the more optimistic forecast from the Government of 0.7%, and 1.9% next year compared with Government expectations of 2.2%. Six months ago, the Commission’s forecast was for 1.1% and 2.3%.
Real unit labour costs dropped by 3.7% last year and are expected to drop by a further 3.1% this year, fourth highest in the EU, and a greater drop than forecast six months ago. The forecast for next year is for a further drop of 2.3%, the largest in the EU and even higher than the -1.1% expected in Greece.
Real compensation of employees per head for this year is expected to fall further than at any time during the past five years, falling by 2.4% compared with last year (eurozone average -0.2%). It is expected to fall by a further 1.1% in 2013 (eurozone average 0.2%). This is considerably more than forecast last autumn, when the figures were -0.3% and -0.5%.
Next year, the forecast is for an increase of a meagre 0.1% — compared with the expectation just six months ago that next year it would increase by 0.9%. The eurozone average for both years is 1.9%. At the same time, labour productivity based on real GDP per occupied person is expected to increase by 1.2% this year compared with last year — considerably more than the 0.1% expected in the eurozone — and increase another 1.2% next year compared with the euro area average of 1%.
“In Ireland the adjustment has been remarkable and further adjustments are expected this year and next,” said Mr Rehn.
But economist Tom McDonnell of the independent think-tank TASC, said that the adjustment was remarkable in the sense that declining labour costs are very rare in modern economics.
“Unfortunately, the declining incomes of workers, coupled with increased taxation, is reducing living standards,as well as having a deleterious effect on domestic demand, and is contributing to the overall stagnation of the economy.”
The growth, however, will come from exports as domestic demand continues to contract this year and is not expected to stabilise until 2013. Further growth is also predicated on the country’s main trading partners growing also.
While the increase in exports was mainly from the capital intensive multinational sector, indigenous firms also made gains, due to increased competitiveness from the drop in labour costs, increased productivity and wage moderation.
Mr Rehn insisted the austerity measures were working: Ireland was in positive growth and the Baltic countries had recovered and returned to growth.
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