OPINION/Garret FitzGeraldThe dramatic slowing-down of the Irish economic growth rate since March last year largely reflects a fall in external demand. But the pattern of our employment figures suggests that as much as a year before this slowdown there were already signs that the economy was starting to come under pressure because of labour supply constraints.
Thus, although external demand - and thus Irish manufacturing output - remained strong between April 2000 and March 2001, the growth of employment was starting to slow down.
In the year ended April 2000, Irish employment had risen by an astonishing 6.3 per cent, but in the following year the employment increase was two-fifths lower, at 3.6 per cent.
During the 12 months to April 2001, the demand for Irish manufactured goods was maintained.
Despite the much slower growth in employment, this demand was met by means of a quite remarkable increase of 8.5 per cent in the volume of output per worker.
It would appear that when in early 1999 our unemployment rate had started to fall below 6 per cent, many firms, sensing an impending tightening of the labour supply, increased the size of their workforce somewhat in advance of demand, which they rightly believed would remain strong for at least the year ahead.
As a result, up to March 2001, in what proved to be the final year of the boom, firms were enabled to achieve a 12.5 per cent increase in output in the face of an emerging employment constraint that made it impossible to increase the numbers at work by much more than 3 per cent. By October 1999 the ESRI, in its medium-term review, was summing up employment prospects for the years ahead in the following terms:
"Even with substantial net immigration, this growth [of employment\] will be well below the rate currently being experienced. This means that the capacity of the economy to grow rapidly in the next decade will be somewhat reduced compared to the situation in the 1990s." Accordingly, it projected that in the first five years of the new decade, our growth rate would fall back to an average of 5 per cent a year, and would, by a decade later, have dropped to around 3 per cent.
This would be close to the norm for industrialised economies.
There are several reasons for this slowing of the growth of the Irish labour supply.
First, between 1993 and 1999, unemployment had been reduced from 15.5 per cent to 5.5 per cent, reflecting a flow into employment that added about 1.7 per cent annually to the labour force.
But with full employment (which, in practical terms, allowing for people changing jobs, means about 3.5 per cent unemployment), about to be achieved, this process clearly could not continue much longer.
Next, the birth rate had peaked in 1980, and thereafter fell by one-third over a period of 14 years.
So from 1998 on, the number of 18-year-olds was going to decline.
This would affect the numbers entering both employment and higher education - although in the latter case a decreasing number of school-leavers might be offset by a combination of a higher participation rate in higher education by students from less well-off homes and an expansion of adult education.
The flow of women from work at home into the labour force was also about to slow down, simply because by 1998 the proportion of younger women engaged in paid work had already reached the European level.
This effectively confined any additions to the labour force from this source to older women returning after a period of childcare. Finally, immigration, in principle, could provide an infinite increase in the labour supply.
However, the fact that by 1999 many Irish emigrants anxious to return home had already done so, together with a rapid escalation of house prices that may, in part at least, have been a consequence of the huge inflow of people, made it unlikely that immigration would continue at that rate much beyond the beginning of the new decade.
Thus, by 1999, the imminence of full employment had made it obvious that if a serious threat of inflation due to overstrain of labour resources were to be avoided, steps needed to be taken soon to damp down demand.
Instead, at that critical juncture, the government actually chose to accelerate demand by trebling the rate of increase of public spending and by further cutting taxation.
It is this misplaced government policy of intensifying demand pressures in the closing stages of a boom that has driven our inflation rate up to well over twice that of the rest of the EU - a process further aggravated by the indirect tax increases of the recent Budget, which may push it over the 5 per cent level.
The danger we now face is that if we fail to recover quite rapidly from this self-induced bout of inflation, we may in the years ahead be unable to achieve even the somewhat reduced growth rates that previously seemed open to us during the remainder of the current decade.
Already our growth prospects for next year are estimated by some economists to have been halved by the measures that the Minister for Finance has decided to take with a view to balancing his Budget.
The Department of Finance's own revised growth estimates would by the end of 2005 leave our economy nearly 6 per cent short of the output level which just a year ago the ESRI believed to be achievable - even in the aftermath of a downturn on the scale that has now occurred, namely one reducing this year's growth below 2 per cent.
But according to the Department of Finance itself, even that depressing prospect is beset with downside risks.
The Department identifies these risks as including a more muted or delayed global recovery; a rise in the value of the euro, affecting our competitiveness in extra-European markets; a jump in oil prices caused by a war with Iraq; and "adverse competitive developments here".
By that is meant excessive private-sector wage increases provoked by reactions of private-sector workers to the Government-created inflation and to the ham-fisted and non-transparent public-sector benchmarking process.
Our chance of avoiding all four of these possible hazards seems slim enough.
If we are hit by any of them, even the limited growth prospects for the next three years suggested by the Department of Finance in its Budget documentation could be prejudiced.
All in all, not a very cheerful end-year prospect!