Deteriorating competitiveness 'threatening recovery'

National Competiveness Council issues stark warning about country’s cost base

Tue, Apr 1, 2014, 22:09

The Irish economy is at a “turning point” in terms of cost competitiveness, the National Competiveness Council (NNC) has warned.

In a report published today, it said upward pressure on wages as well as rising property prices were posing a serious threat to the country’s hard-won recovery.

The council said it believed recent price falls were largely a cyclical response to the Irish and international recessions and the ensuing drop in demand rather than a response to structural changes in the Irish economy.

“Ireland’s relative cost competitiveness is now deteriorating vis-à-vis our main competitors; labour costs are rising again following a number of years decline, industrial electricity prices have increased in recent years; and an upward trend is evident across a range of business service costs,” it said.

Compiled as part of the Government’s action plan for jobs, the council’s “Costs of Doing Business in Ireland 2014” report, said Ireland’s cost base had improved across a number of metrics since the crash

However, despite these improvements the economy remained a high-cost location for a number of key business inputs.

Following a number of years of marginal decline, labour costs were once again on the increase.

In 2012 and 2013 Irish labour costs grew by 2.4 per cent and 0.5 per cent respectively, against a backdrop of still elevated unemployment, it said.

The report noted that gross earnings here were the 8th highest in the euro area while net wages were the 6th highest.

Significantly, it said the cumulative impact of increases in income taxes, changes to bands and the introduction of the Universal Social Charge had weakened competitiveness since the onset of recession.

After several years of cost reductions, the council said the commercial property market had begun to stabilise. There was now, however, a risk of shortages in prime office space which could result in rent increases, it said.

The report also found electricity costs were relatively high with Ireland ranked as the 5th and 6th most expensive location in the euro area for SMEs and large users respectively.

In addition, diesel prices were on average 7 per cent more expensive here than elsewhere in the euro area.

“To deliver the jobs growth that Ireland needs, our international cost competitiveness needs to continue to improve. The analysis from this report points to the Irish economy being at a pivotal point in terms of cost competitiveness,” NCC chairman Dr Don Thornhill said.

Minister for Jobs, Enterprise and Innovation Richard Bruton said: “In the last three years we have seen substantial improvements in Ireland’s competitiveness, going from 24th in the IMD world competitiveness rankings in 2011 to 17th last year.”

He said this had played a major part in the export-led jobs recovery.

However, Mr Bruton said today’s report, “showing that our competitiveness faces enormous challenges, must serve as a major wake-up call for anyone who thought that our competitiveness issues were resolved.”

Martin Shanahan, chief executive of Forfas, which provides the NCC with policy analysis support said: “We must relentlessly pursue further improvements in our costs competitiveness. Ireland must learn the lessons from the past - we cannot afford any slippage in our international competitiveness if we are to achieve the enterprise growth and employment targets set out in the Government’s action plan for jobs.”