Economic variables show effect of US slowdown in Ireland

The signs of a slowdown in the US economy are already reflected in a host of official statistics and it is clear that that downturn is having an effect on the Irish economy. Evidence of this may not be that obvious, but is creeping into figures used to measure Ireland's economic performance. All sorts of statistics used to gauge growth here are changing.

They are showing a fall in the rate of economic expansion - a slowing down and a levelling out. When the Economic and Social Research Institute (ESRI) looks at the economy in its Quarterly Economic Commentary some of the main things it examines are trade, unemployment, inflation and interest rates - which help build up a picture of the economy's wellbeing.

One of the most obvious signs of economic success has been the jobs factor. Job opportunities abound and there are not enough people to fill them. Evidence of the take-up of job vacancies across all skills and all sectors of the economy can be found in the most recent Quarterly National Household Survey. It shows the unemployment rate in the last quarter of 2000 fell below 4 per cent to 3.9 per cent. Mr David Duffy, economist with the ESRI describes this as "one of the major achievements of the Irish economy in recent years". He notes that in the early 1990s our unemployment rate was still nearly 16 per cent.

Given that the unemployment rate is now below 4 per cent, Mr Duffy believes the economy is moving towards full employment, where people are effectively only unemployed when they are moving jobs, finishing school or are not working for reasons ranging from poor education or ill-health.

According to its latest Quarterly Economic Commentary - published in March - the ESRI expects that the decline in the unemployment rate will slow from an average unemployment rate of 4 per cent in 2000 to an average unemployment rate of 3.3 per cent in 2001 and 3.2 per cent in 2002. Three per cent - or fractionally less - is as low as it will probably go, says Mr Duffy.

There will also be a sharp slowdown in employment growth. "As part of the international slowdown that is happening at the moment, we would expect employment growth to slow from 4.7 per cent in 2000 to 3 per cent in 2001 and to 1.9 per cent in 2002. That's a reflection as much of full employment as lower rates of economic growth," Mr Duffy says.

The level of interest rates, which also reflect growth or the slowdown in growth in this case, is also on the decrease. Interest rates are no longer set by the Central Bank in Ireland, but by the European Central Bank by virtue of Ireland's participation in the European single currency.

There is little doubt that if the Central Bank in Dame Street in Dublin retained its independence, interest rates here would be higher. The Bank would seek gently to slow an economy which had shown unprecedented growth in recent years, to ease inflation by reducing demand and to slow the house-price spiral. Instead, interest rates are currently at 4.75 per cent - a rate deemed to be suitable by the European Central Bank for the euro zone as a whole where economic growth has been much slower than in this State. The ESRI expects interest rates to fall further over the next two years.

One cut is expected soon to be followed by a subsequent reduction in the second half of the year to bring the interest rate to 4 per cent in 2002. "That's a reflection really of the ECB cutting rates as interest rates internationally come down," says Mr Duffy.

The good news is that inflation is on the way down from its peak of 7 per cent last November.

"It would have been on the increase because oil prices increased dramatically. The euro, instead of appreciating as people expected, actually weakened. Very strong domestic growth pushed up labour costs and the costs of services and a change in taxes in the budget increased the cost of tobacco products. That all contributed to the increase in inflation in 2000," explains Mr Duffy.

According to the Consumer Price Index figures for February, the annual rate of inflation was running at 5.3 per cent. The ESRI's most recent commentary, says Mr Duffy, expects that figure to come down during the year to an annual average of 4.2 per cent for 2001.

"We expect it to come down because of lower oil prices and a stronger euro. They would be two of the main driving factors there."

It is expected to decrease to 3.6 per cent in 2002, almost half of what it was at its peak.

As a small open economy, trade is very important for Ireland and lately trade has been good. Figures for 2000 indicate that exports rose by 24.4 per cent, imports rose by 24.5 per cent and the economy still had a large trade surplus, which grew by 24.3 per cent. However, the forecast for this year is not as rosy and will see the external side of the economy slowing down in 2001 and 2002.

"We would expect the growth in exports to slow quite substantially in 2001 and 2002, reflecting the slowdown in the US but also the impact of foot-and-mouth on activity levels in Europe as well," says Mr Duffy.

Merchandise trade exports are expected to slow to 13 per cent in 2001 and 12 per cent in 2002. Import growth is expected to slow as well - if all other growth is slowing down we are not going to need as much and that will then have an impact on the need for imports which are expected to slow to 12 per cent in both years.

The trade surplus will not show any significant growth and may even reduce in size, but Mr Duffy says there will be no trade deficit.

GNP, consumption and investment will be explored in the next Business 2000 article on May 14th.