Labour shortage cools growth rate

Gloom has descended on the Irish economy, judging by the tone and content of the latest economic headlines - the Celtic Tiger is badly wounded, it appears, if not terminally ill.

Yet it is all too easy to overstate and magnify the negatives whilst losing sight of the positives still underpinning the economy. The reality is that growth this year has certainly slowed relative to last year's record pace, but that the economy has not fallen off a cliff, as one might conclude from some of the recent media coverage of developments here and abroad.

We now know, courtesy of the CSO, that the economy grew by 11.5 per cent last year, the strongest performance in the history of the State (2000 really was one year in a thousand). Moreover, the initial growth estimate for 1999 was revised up to 10.5 per cent, so the Irish economy has been growing at a double-digit pace for some time. The quarterly GDP breakdown confirms this, and puts growth at an astounding 12.1 per cent in the fourth quarter of 2000, so implying that the economy entered 2001 with very strong momentum.

The importance of this is often overlooked or not understood - if the level of GDP was unchanged through the year (i.e. GDP in the fourth quarter of 2001 was the same as the Q4 2000 figure) the average growth rate for 2001 would be more than 6 per cent.

Three factors have conspired to affect growth adversely this year, two transitory and one long term in nature and therefore more fundamental, although the three have become confused in the public mind.

The fundamental development is that labour force growth has slowed, which in turn means that employment growth has decelerated. The latter has grown by more than 5 per cent per annum in recent years, but a figure nearer 3 per cent is more likely in 2001 because the pool of unemployed has largely dried up and the surge in female participation in the labour market has slowed.

Migration is still a positive feature, but the data show that the labour force will expand by around 40,000 this year compared with 70,000-80,000 per annum in the latter part of the 1990s.

So what we are seeing in 2001 is partly a transition to a slower medium-term growth path reflecting this scarcity of available labour.

However, demand in the economy has been hit by two short-term shocks, which although transitory, have had an adverse impact on confidence and spending. The first is foot-and-mouth, which had a pronounced effect on social and economic life around the State from March through to June. Petrol and drink sales were particularly affected as tourism, both internal and external, took a battering, the extent of which was revealed in tax receipts from March onwards. Spending did pick up strongly in June, judging by the excise receipts for that month, and so the worst may be behind us on that front, on the assumption that the Republic is spared another outbreak. It is instructive to note that unemployment fell in June after rising in April and May, so lending support to the view that the job losses were skewed towards tourism and beef processing and therefore temporary.

Confidence was also adversely affected by the US downturn, which was led by manufacturing, including IT, and gave rise to apprehension here as to employment prospects, given the preponderance of US firms in the foreign multinational sector. In the event job losses have materialised, as the US corporate sector has retrenched, but in the aggregate such losses have not been huge.

Of course, there are still risks on that score as a cyclical downturn is under way but it is disingenuous to pretend that there are short-term policy levers that the authorities can pull to negate or offset the decisions of corporate America.

The US economy will recover, as night follows day, be it in the autumn or next spring, and so will investment and confidence. In fact the US downturn and accompanying stock market weakness has had a much bigger effect on discretionary spending in Ireland than on employment per se - this is clearly evident in business travel, recruitment advertising and the upper echelons of the housing market, which is primarily driven by equity wealth.

What is surprising is the strength of Irish exports, as this year's performance has matched that of 2000: exports rose by some 24 per cent last year and had risen at a similar rate in the year to May. The most recent monthly figures confirm a deceleration, but the average export gain in 2001 may still be sufficient to boost GDP growth, rather than act as a negative impetus, as the consensus is projecting.

Finally, a puzzle: most forecasts expect personal incomes to rise by some 13-14 per cent this year, and the more bearish are looking for a sharp deceleration in consumer spending. The corollary is a marked rise in savings, so why the headlines bemoaning the dribble of flows into the new Special Savings Schemes?

Dr Dan McLaughlin is chief economist with Bank of Ireland