The Economic and Social Research Institute (ESRI) has dispelled some of the seasonal cheer with its forecast today that the rate of economic growth in 2008 is shaping up to be the slowest since 1992. The principal cause of the slowing national growth rate is the steep decline in house building activity. House completions are now forecast to fall from a peak of 88,000 in 2006 to 55,000 next year. Since house building accounts for 15% of total activity in the economy, a sharp decline in building output acts to drag down national economic performance.
The ESRI is now forecasting that the economy will grow by 2.3% next year. The speed of the decline in the economy's fortunes can be judged from the fact that, as recently as last year, the economy was expanding at a rate of 6.5%. The forecast deceleration in the pace of economic growth will cause employment to mark time and the number of people unemployed to rise to a projected 130,000, a level not seen since 1998.
Moreover, Department of Finance forecasts, contained in the 2008 Budget published just a fortnight ago, do not suggest an imminent return to robust growth even after 2008. The department does not foresee annual growth reaching even 4% in any of the next three years.
Faced with the prospect of flagging growth, static employment and rising unemployment, it is imperative that the Government makes clear how it intends to steer the economy back to a path of solid and sustained growth in the years ahead. Analytically, the answer is simple. The domestic economic boom is drawing to a close. In consequence, growth in the future must be earned on foreign markets. But Irish goods and services have been losing their competitive edge. In consequence, Ireland's share of world trade has been slipping in recent years.
Setting the economy back on the road to strong and stable growth requires the regaining of international price and cost competitiveness. If Irish goods and services cannot match the output of trade rivals in terms of price, quality and service, they will find few buyers on international markets. Regaining international competitiveness requires action on three fronts.
First, the pace of productivity growth must be quickened. This requires investment in plant and machinery, people and ideas, not investment in housing. It also requires the introduction of a major productivity enhancement programme in the public sector. International data show that in many key areas of the public sector, productivity, or output per person, is lower now than it was a decade ago.
Second, future pay negotiations must take cognisance of the need to sell increased volumes of Irish goods and services on foreign markets. Third, more forceful use must be made of competition policy to contain costs in those areas of the economy protected from foreign competition. This includes central and local government and the charges they impose on business. The year ahead will test the Government's resolve in applying the answer.