Workers expect to share in growth

Comment/Manus O'Riordan: Much spin has been given to the issue of wages arising from the latest Quarterly Economic Commentary from the Economic and Social Research Institute (ESRI).

Despite the headlines, the commentary does not say anything more specific about Sustaining Progress other than to recognise that the first half did indeed "bring about wage expectations more in line with the trend in price inflation" and to express the aspiration for the second half of "steering wage growth rates in line with both realistic national productivity growth expectations and cost trends across competitor nations".

But there are implications in the ESRI forecasts that are quite unrealistic. When the ESRI expects to see a situation next year where the real value of earnings would grow by no more than 0.8 per cent, it has lost touch with reality when one also considers its forecast that gross national product (GNP) growth will accelerate still further to a rate of 4.4 per cent.

Realism will only be restored as to where we go from here when there is also a more realistic appreciation of what has occurred during the first half of Sustaining Progress.

Both unions and employers were agreed on the hostile nature of the external economic environment against which the pay agreement was originally negotiated. In the 13 month- period since January 2002, the euro had appreciated against the dollar by 26 per cent and against sterling by 10 per cent. And the international recession had ensured that GNP growth in the Republic was zero in 2002.

IBEC was indeed more than happy with the outcome of those wage negotiations. It pointed out that the agreement raised average pay costs for 2003 by no more than 3.5 per cent which, when set against a inflation that also averaged 3.5 per cent, was a real wage freeze.

It was only the final six months of that 18-month agreement that allowed for a resumption of real wage growth.

Over that whole period, the pay increases averaged out at an annualised rate of 4.38 per cent, against an average annualised rate of inflation of 2.88 per cent. In other words, the real wage gain was 1.5 per cent annualised.

In the meantime, however, the Republic's economic recovery has been far more vigorous than originally expected. Whereas Government projections had suggested GNP growth rates of 2.2 per cent and 2.9 per cent for 2003 and 2004 respectively, the Central Statistics Office has now told us that GNP actually rose by as much as 3.3 per cent last year, while IBEC's projection for this year is 3.7 per cent.

To put it another way, while GNP was expected to grow at an average annualised rate of 2.4 per cent over the first half of the agreement, the outcome has in fact been lifted by a good percentage point more, with GNP actually growing at an average annualised rate of 3.4 per cent.

Since the real value of the wage increase amounted to less than half that rate of GNP growth, it is all the more insulting for IBEC to now complain that the first half of Sustaining Progress was front-loaded in favour of workers. It is doubly insulting when it is Irish employers that have been front-loaded and back-loaded.

With by far the lowest corporation tax rate in the EU, they received still further tax concessions in last December's Budget as the tax burden on workers was increased. The Government accordingly budgeted for an increase of just 3.6 per cent in the return from corporation taxes this year, in contrast to the 10 per cent increase from the PAYE sector.

Irish employers are also facing a much healthier economic environment than at the outset of Sustaining Progress. That agreement didn't threaten a single closure or job loss, since it contained extensive provisions for partial payment or complete non-payment of its terms if such payments were deemed to pose any such threat.

The 11,000 decline in industrial employment during 2003 was due to the international recession. But even here a corner has been turned, because the seasonally adjusted figures show that no more than 300 job losses occurred in the final quarter of the year.

The corner has also been turned in respect of the exchange rate environment. The appreciation of the euro against the dollar over the past 13 months has been only at half the rate of the previous 13 months.

The euro now stands at $1.23. IBEC has expressed the view that if it were to rise to $1.35, significant economic damage would occur.

But the ESRI's forecast is for it to continue averaging no more than $1.21 this year and to fall back to an average of $1.17 next year.

More significantly, the euro/sterling exchange rate today is exactly the same as it was 13 months ago, giving a particular boost to the recovery of traditional industry.

Irish employers are the envy of their counterparts in continental Europe. In the Spring Economic Outlook of UNICE, the European Employers' Confederation, IBEC provides growth forecasts for 2003 and 2004 that are the highest of all member-states and twice the EU average.

But IBEC also forecasts that, while the annual rate of inflation may drop to 1.3 per cent this month, it will accelerate once more to twice that rate at 2.7 per cent this coming December.

For the second half of Sustaining Progress, IBEC's inflation forecasts are for an average annualised rate of 2.33 per cent, or barely 0.55 per cent below the average for the first half.

On the other hand, it also forecasts that, during this second half of Sustaining Progress, GNP will grow at an average annualised rate of 4 per cent, or 0.6 per cent above the already higher-than-expected growth performance of the first half.

Not unreasonably, workers are expecting real wage increases that will share in such increased growth.

Manus O'Riordan is chief economist at SIPTU