ESRI report - Reliance on one industry is a danger

While short-term economic indicators look promising for the remainder of this year and next year, the Economic and Social Research Institute (ESRI) has warned that the latest figures published by the Central Statistics Office (CSO) indicate that declining productivity and an over-dependence on the construction industry could threaten further economic growth from 2008.

Some two-thirds of the construction industry is involved in building dwellings. Last year 86,000 dwellings were completed and a further 75,000 to 80,000 will be completed in 2006. This is the highest rate of dwelling construction in Europe, and more than twice the current rate in Britain.

It is important that the country should not become too economically dependent on one sector. With the provision of so many new dwellings, demand is likely to decrease and this slowdown could have knock-on implications. Pure economics indicate that house prices are likely to stabilise with the sheer volume of supply.

There are already ESRI warnings about the level of borrowing to pay for these dwellings.

Mortgage debt, which stood at around €33 billion in 2002 has more than tripled to €100 billion in the five years since then. Last year, it increased by €12 billion.

The average size of a mortgage, which was €102,000 in 2000 rose to over €200,000 last year, with the average cost of new houses soaring from €166,000 to over €272,000 in the same period. Over a third of the homes sold are for more than €300,000.

The number of people employed in the construction industry — which was worth over €32 billion last year — stands at 242,000 people. This means that some 12.8% of the workforce is employed in construction, compared with a 10% average in the remainder of Europe. Little over 10%, or 25,000 of the entire construction workforce, are non-Irish nationals, with about 15,000 of those coming from the new EU accessions states of Poland, Lithuania, Latvia and Slovakia.

In addition to the income tax paid by workers, the Government collected over €2 billion in stamp duty on property transactions last year, which was a three-fold increase in the three years since 2002.

The ESRI has warned, however, that our current prosperity could be threatened by the fact that wages are growing faster than productivity. While labour accounted for 49.6% of GNP in 2002, this figures is expected to rise to 53.9% by the end of this year. This is evidence of a decline in productivity.

Last year, productivity grew by less than 1%, but wages grew by over 3%, which will inevitably lead to a decline in competitiveness. The ESRI suggests that for current growth to continue there would have to be a further increase in real wages to attract more immigrants, but this will further undermine competitiveness and that economic mix is not sustainable. Economists predict that the GNP growth rate is likely to fall to 3% in 2008 and to 2.5% in each of the following two years.

The ESRI further predicts that inflationary pressure, brought about by higher energy prices and increased interest rates, will drive up current spending by 10%, rather than the 7% officially forecast. In the circumstances it is vital that the Government gauge the situation properly and not engage in the kind of reckless elections promises that got the country into economic difficulties in the late 1970s and 1980s.