'Sell in May and come back on St Ledger's Day.' Return mid-September this stockmarket adage would advise. With the recent market turbulence hitting the Dublin Iseq, rising interest rates, concern over slowing housing construction and some job loss announcements, a break from the fray to take stock is very advisable this long weekend, writes Danny McCoy.
Reflection should reassure us that the Irish economy remains in good health. The belief that Ireland's prosperity may be coming to a shuddering end does not stack up but a reality-check is nonetheless warranted.
Yes, the growth rate will slow somewhat as the year goes on. Yes, activity in new house-building has peaked and will now return to sustainable levels. Yes, consumer spending will not grow as fast in 2008 as it has grown this year driven by the SSIA release. Yet none of these spell disaster for the economy. Rather, they are signs of a welcome rebalancing of the economy. A rebalancing that we should cheer, not fear.
National Accounts data show that GNP grew by 6.5 per cent in 2006. This strong growth rate was maintained in the first quarter of the year as GNP grew by 6.4 per cent. Most encouragingly, manufacturing and exports both performed strongly in the first quarter of the year. The external sector is beginning to regain its position as the engine of growth in the Irish economy. GNP growth will be close to 5 per cent this year and in the region of 4 per cent in 2008. These are healthy growth rates indeed, for any economy.
The current high inflation rate does remain a worry, as does our low productivity growth. However, two things are important to remember in this context. Firstly, for international inflation comparisons we should use the EU harmonised index, which at 2.8 per cent is almost half of the Consumer Price Index measure. Secondly, this current bout of inflation is driven mainly by external factors: interest rates and energy.
However, this does not give us licence to be lax with factors under domestic control. The Government has a responsibility to curtail services inflation by controlling costs of Government services such as health, education, energy and local charges.
The national obsession with the property market has distracted us to a certain extent from what is happening elsewhere in the economy. When the market was booming, we paid scant attention to declining competitiveness and the fact that Ireland was losing market share as an exporter.
Competitiveness is like a twin-stroke engine; productivity growth coupled with cost curtailment. Both components have gone in the wrong direction in recent years causing Ireland to slip in international competitiveness leagues. A slow-down in the construction sector will take place as activity returns to a rate that is sustainable in the medium term. While building new housing stock will slow, the construction sector will still be a strong contributor with commercial activity, public infrastructure and refurbishment of the existing housing stock financed by the accumulated wealth in the Irish economy. The Bank of Ireland wealth report earlier this week points out that Ireland is the second wealthiest nation in the developed world in per capita terms. However, the slow down in housing will act as a drag on economic growth in the short term.
What is ultimately important for living standards is not how much your house or your neighbour's house sells for. It is time to get back into reality. Ireland is a trading nation, and our prosperity is determined by our ability to sell our goods and services abroad. Most indicators of economic fundamentals for the first half of the year have been encouraging. The value of external trade in the first five months grew by 6 per cent, compared with a mere 1.5 per cent for the same period in 2006. Exchequer returns at the end of July are in line with Government expectations.
Income tax and VAT, mirroring the incomes and consumer spending fundamentals of the economy, are strong. The weakness is stamp duty while capital gains revenues reflect the slow-down in the property market. The labour market is one of the nation's great strengths. Ireland was one of four countries singled out in the most recent IMF World Economic Outlook in terms of the success of their labour market reforms. That IMF report also points out that the world economy is at its strongest in 30 years. We are living in an unique phase for mankind. Since 1980 the globalised workforce has quadrupled when weighted by international trade activity. This is a greater opportunity for Ireland than a threat, as some would have us believe. The global economy continues to steam ahead. The IMF forecasts global growth of 4.9 per cent in this year and in 2008.
Employment growth in Ireland has been phenomenal. Employment has grown by over 20 per cent since 2000. While there have been some instances of highly publicised redundancies this year, the actual redundancies for the first seven months of 2007 are only 8.3 per cent up on the same period last year, signifying 15,054 jobs lost. However, in an economy that created 87,000 additional jobs in 2006 and is likely to add more than 60,000 jobs this year, this is hardly disastrous. We are experiencing job churning rather than job losses.
In a European context, Ireland continues to shine with higher growth rates and lower employment than most of our peers - even taking into account a slight decrease in growth and a slight increase in unemployment that are likely to occur going into 2008.
The euro area grew by 3 per cent in the first quarter of the year and is growing at its fastest rate for six years. Even with growth slowing somewhat, Ireland will continue to outperform its neighbours by a good margin. We should look forward to September and this economy is a better bet than anything on offer on St Ledger's Day.
Danny McCoy is director of policy at Ibec, the Irish Business and Employers Confederation. Garret FitzGerald is on leave