ESRI sees 6% growth but warns on living standards

The return to rude good health of the Irish economy, with growth of nearly 6 per cent, will not be translated into the sort of improvements in living standards experienced when the Celtic Tiger first emerged.

The Government-backed Economic and Social Research Institute has outlined in its spring economic commentary a number of reasons - including the influx of migrant workers - why we will never again see the sort of jumps in living standards that took place in the 1990s.

The economy is expected to grow by 5.7 per cent this year and by a similar figure next year, according to the ESRI. However, living standards - as measured by wealth per capita - will rise by 4.5 per cent this year and 5.8 per cent next year. This is some way off the 8 per cent average growth enjoyed between 1998 and 2000.

The explanation, according to the ESRI's Danny McCoy, is that unlike in the 1990s, the number of people sharing in the "economic pie" is growing. The exceptional economic growth experienced in the last decade was fed by an abundant supply of indigenous labour, primarily the unemployed and women entering the workforce for the first time. As a result the population remained relatively static as the economy grew, boosting the per capita measure of economic output used to calculate living standards.

This time around the economy is at almost full employment and the growing economy's demand for labour can only be met by immigrant workers. As a result of this, and other factors, the population has grown, thus diluting economic output when measured in per capita terms. "There are more people sharing in the growing pie," said Mr McCoy, who is the main author of the ESRI spring economic commentary published this morning.

Mr McCoy argues that the correct response is to ensure that immigrants are given the fullest opportunity to contribute to the economy. He said that research showed immigrants in Ireland were not using their educational and other qualifications to their full potential, with many holding jobs for which they were overqualified.

"If immigrants worked in occupations which utilised their educational abilities fully, immigration would have increased GNP by 3.3 per cent in the five years to 2003, rather than the actual contribution of 2.6 per cent," he said.

Rather than GNP, the ESRI uses Real Gross National Disposable Income as a measure of living standards. It adjust the value of goods and services produced by the economy for things such as multinational profits. The ESRI argues that it is a more appropriate measure for Irish living standards than the cruder measure of economic output adjusted for purchasing power that is employed by bodies such as the Organisation of Economic Co-operation and Development (OECD).

Mr McCoy said yesterday that the ESRI's analysis cast significant doubts as to the accuracy of the recent OECD survey which placed Ireland fourth amongst the developed nations in terms of standard of living. He said that the ESRI measure would place Ireland at a "creditable" 15th ranking.

The organisation's spring bulletin paints an upbeat picture of the economy's prospects, saying that further growth will be fuelled by "the benign external environment".

Last year saw the strongest performance by the global economy since the mid-1970s and the growth in the US that underpinned it will "continue for the foreseeable future," according to the ESRI.

In addition to growth approaching 6 per cent this year and next, it believes that despite the upward trend in oil prices, inflation will be only marginally above the 2 per cent target set by the European Central Bank for euro-zone members. Unemployment will remain around 4.3 per cent for both years.