Migrant labour 'crucial' to Irish growth outlook

Economic growth in the Republic would be about one-third slower without immigrant labour from the EU accession states, according to a new analysis from Bank of Ireland.

Dr Dan McLaughlin, Bank of Ireland's chief economist, yesterday forecast growth of 5 per cent for 2005 in gross domestic product (GDP) terms, but he said the supply of labour from abroad would be crucial to this.

"EU accession has boosted the Irish economy's potential to grow and its growth rate," said Dr McLaughlin. "Our growth rate without immigration wouldn't be 5 per cent; it would probably only be 3.5 per cent."

The Republic is one of only three of the original 15 EU states that allows citizens of the accession states the automatic right to work without visas.

A report from Brussels-based civil rights group European Citizen Action Service showed earlier this month that the Republic had attracted 85,000 migrant workers from accession states in the year following EU enlargement in May 2004. This was six times the number of accession-state citizens who registered for work in the UK in the same period.

"EU accession has opened up a vast pool of unemployed reserves to meet Irish demand," said Dr McLaughlin. He suggested that the State could benefit from a "more coherent system" for processing migrant workers.

Dr McLaughlin's latest growth forecasts, which are about 1 percentage point more bullish than those of the Department of Finance, are based more on domestic drivers than international influences.

For gross national product, which strips out the contribution of the international sector and is considered to offer a good feel of the economy on the ground, he is forecasting growth of 6 per cent for this year, up from 4 per cent in 2004.

The main difference between the GNP and GDP forecasts is the weakness in exports that has become evident.

"This economy is very much an indigenous growth story rather than an external story," he said. "The consumer is king."

The Bank of Ireland analysis sees domestic demand, which is comprised of consumer spending, business investment and Government spending, climbing by 6 per cent in 2005. Average inflation is forecast to rise from 2.2 to 2.5 per cent.

Dr McLaughlin believes that consumer spending is largely being fuelled by household income, which he says has increased by 10 per cent since the start of 2001.

On the public finances, Bank of Ireland forecasts a €1.2 billion overshoot in tax revenues and some spending undershoots emerging at the end of the year.

This would allow the Government to once again borrow less than it anticipated in January, thus leaving it with a small Exchequer surplus for 2005.

Dr McLaughlin does not expect euro-zone rates to rise this year but said a half-point increase to 2.5 per cent could be expected for 2006 as economic conditions improve.

This would imply variable mortgage rates of close to 4 per cent for Irish consumers.