Given the deceleration in the growth of employment that began here over a year ago, as well as the near-recession in the United States, it is almost certain that we shall experience a slowing down of economic growth during the course of this year. Are there signs that such a process has in fact begun - and, if so, when did it start?
Taken in conjunction with the Central Statistics Office's estimates of output in the first three quarters of last year, the growth estimates for the year 2000 as a whole published recently by both the Central Bank and the Economic and Social Research Institute clearly imply an actual drop in output in the fourth quarter of 2000 - a fall of as much as 6 per cent in the case of the Central Bank figures. But this runs counter to what in my view is clear evidence of continued rapid growth of output in that quarter.
Thus, the volume of industrial output in that quarter rose by almost 20 per cent above the third quarter figure, or 11 per cent if seasonally adjusted. Well over two-thirds of our manufacturing output is now exported, and this big increase in manufacturing output reflected an extraordinary boom in exports during the quarter, when they rose by as much as 15 per cent, or 13 per cent seasonally adjusted.
At the same time, in the home market retail sales recorded an increase of over 7 per cent between the third and fourth quarters, or almost 3 per cent seasonally adjusted. This was a faster growth rate of retail sales than in any earlier quarter.
Thus all the evidence suggests that far from national output having declined in the final quarter of last year, as implied by the ESRI and Central Bank reports, it may actually have accelerated.
What of the first quarter of the current year? Here the picture is somewhat less encouraging, especially as export figures for March are not yet available. The export data for the first two months show a fall in exports. However, this seems at variance with a further, albeit smaller than previously, increase in industrial production during that quarter. We shall have to await further export figures before we can reconcile these conflicting signals.
Seasonally adjusted retail sales also rose in the first quarter by a further 3 per cent, suggesting that domestic demand remained strong. On the other hand since last July the volume of imports has more or less levelled off, and that could be a longer-term sign of impending lower economic growth.
As for unemployment, since last December, the decline in the percentage out of work has been halted. But as the figure of 3.6 per cent effectively represents full employment, it is in no way surprising that it has not fallen further. What is, perhaps, more significant is that right up to April there was no sign of any rise in the percentage unemployed.
All in all, during the first quarter growth certainly slowed, but it is not clear that it halted. Now, if I am right about output having risen significantly in the fourth quarter of last year, and having at worst slowed in the first quarter of this year, then, even if quarterly output were to remain throughout the next 12 months static at its present level, year-on-year economic growth between 2000 and 2001 would still be about 6 per cent. Why? Simply because for the first three quarters of this year it would be running above the level of the same quarters last year.
However, although the first quarter may have been marked by some modest additional growth, and while it is possible that this could be maintained in quarters to come, we cannot exclude the possibility of some reduction in the overall volume of national output in subsequent quarters. Tourism and agriculture will certainly have been hit by the foot-and-mouth disease.
With well over two-thirds of manufacturing output being exported, industrial activity by foreign-owned firms is clearly vulnerable to the economic situation in external markets. However, the activities of these firms in Ireland are sheltered from the direct effects on demand of a US recession by virtue of the fact that not much more than one-sixth of their exports are sold to the United States. Five-eighths of their exports go to Europe and one-fifth to the rest of the world.
For the products of our indigenous industrial sector the US market is also relatively small, although, of course, important for individual sectors. Overall, only one-seventh of the exports of indigenous firms are shipped to the US.
Will the slowdown of economic activity which may now be starting be sufficient to reduce inflationary pressures in our economy?
A levelling-off of output at its end-2000 level would certainly help to damp down some of the pressures, but not all of them. The perverse and dangerous fiscal policy pursued by the Government during the last couple of years has created some pressures which, for the time being at least, have a life of their own, and will not, in the short run, anyway, be much affected even by a flattening out of output.
The scale of the damage done by the last two Budgets can be judged from the damning comments made on them at the time by the Central Bank - a body that is always careful to speak in measured terms about Government policy.
What was sparked off by this inappropriate fiscal policy was a mood of excess - one in which the concession of inordinate pay claims reduced our competitiveness.
In 1999 the average increase in pay per worker was 5.5 per cent. Last year this figure is estimated to have jumped to over 8.5 per cent. And this year average pay per worker is forecast to rise by well over 11 per cent - in a year in which output may well remain unchanged at its end 2000 level.
An increase in average pay of 20 per cent within two years leaves us very vulnerable to external competition.
Above all, pay increases on this scale leave many of our industries vulnerable to the delayed, but ultimately inevitable, revaluation of the euro in relation to sterling and the dollar. This threat has now been hanging over us for well over 12 months, but it could become a reality at some time later this year. That is when Irish industry, and especially the indigenous sector which, unlike the multinationals, sells two-fifths of its output to Britain and the US, will be severely tested.
gfitzgerald@irish-times.ie