|More than 90% of Irish exports are made by foreign-owned firms and the ESRI forecasts suggest that 47 percent of total exports in 2009 will be services. For the year ending 2007 Q3 services exports grew by 15.9 per cent in value terms. Balance of Payments data suggest that much of that growth was concentrated in financial services (mainly related to Dublin's International Financial Services Centre) and business services (e.g. Microsoft Ireland's exports), which grew by 19.7 percent and 29.5 percent respectively. The Institute estimates that for 2007 as a whole services exports grew by 14.5 percent in value terms, with non-tourism services exports growing by 15 per cent and tourism exports growing by 9 per cent. Services export growth is expected to moderate in 2008, although still contributing more than merchandise to total export growth. Almost 80 percent of the value growth in exports this year will be accounted for by services.|
As service exports grow in importance while merchandise exports decline, an issue that will come to the fore is the relative job creation value, as for example an aircraft leasing company with a payroll of 10 people could transact in money volumes comparable with a manufacturing firm of say 1,000. Two of Ireland's biggest companies by revenue, are owned by Microsoft and operate from the offices of a Dublin law firm - they do not have any direct employees.
The Economic and Social Research Institute (ESRI) says in its Spring 2008 Quarterly Economic Commentary that the Irish economy will grow at the slowest pace in 2008 since 1988. Net new job creation will be zero and there will be a moderate recovery in 2009 when public finances are expected to deteriorate further and the Exchequer deficit will rise above €7 billion.
The ESRI says in its QEC, that the economy will grow by 1.6 percent in 2008, mainly related to the contraction in house building.
The ESRI's latest forecast compares with a 2.8 percent projection in the December 2007 Budget and its own forecast for real growth in gross national product in December of 2.3 percent.
Against a background of a slowing economy, inflation is rising. The CSO reported on Thursday that the annual rate of inflation accelerated to 4.8 percent in February from 4.3 percent in January.
Food prices rose 8.5% - the highest since 1984.
Excluding mortgage interest, the annual rate of price increase still accelerated to 3.5 percent in February from 3.1 per cent in January. The Budget 2008 forecast that, excluding mortgage interest, has average prices rising by 2.4 percent this year.
In the QEC, the ESRI forecasts 50,000 housing completions this year, compared with 78,000 houses built in 2007. The fall in housing output is expected to result in a 7.4 percent fall in the volume of gross fixed investment during 2008.
The ESRI says that in 2009, a fall to 45,000 completions is expected. However, the Institute says that the fall in house prices may already have been arrested. It says that house prices in the early part of 2008 are some 15 percent lower than in December 2006. On this basis, it says: "For 2008 and 2009, we expect generally stable house prices."
The growth in the volume of household spending is forecast to fall to 3.0 percent in 2008. The ESRI projects that money wage growth will decelerate from 5.5 percent in 2007 to 4.0 percent this year.
| Although a recovery is anticipated in 2009, the ESRI does not foresee a return to the growth rates that were experienced for much of this decade. However, this steadier pace of economic growth is likely to be more sustainable. This point on sustainability is well illustrated by the figures in Table 7 on the proportion of housing investment in GNP. From its peak of 15.6 percent in 2006, the Institute expects to see this falling to 8.2 percent in 2009. |
The Institute says that there will be no increase in employment this year, while the numbers out of work are projected to rise by 33,000 to 135,000 in 2008.
As a result, the unemployment rate - the numbers out of work as a percentage of the labour force - is expected to rise to 6.0 percent in 2008 from 4.6 percent last year.
The slowing economy will have a serious impact on public finances as current public spending was projected in the December Budget to rise by 9.3% in 2008 following an increase of 12.3% in 2007.
The ESRI forecasts that an Exchequer surplus of €2.3 billion in 2006 will be transformed into an deficit of €7.5 billion by 2009 - a change of almost €10 billion in the public finances in three years.
These figures imply that the turnaround in the public finances since 2006 is now larger than previously estimated. A General Government surplus of 2.9 percent of GDP was recorded in that year. The Institute says that if the forecast of a General Government deficit of 1.2 percent of GDP is realised this year, the turnaround will be over 4 percentage points. It says as discussed in the previous Commentary, this in itself is not a concern if it represents a short-term response to an economic downturn. However, the forecasts for the public finances in 2009 point to the challenge of bringing the public finances back to a more sustainable trajectory.
For 2009, the ESRI have adopted a technical assumption that voted current expenditure will grow at a rate of 7.5 percent. With current revenues forecast to grow by only 3.7 per cent, the General Government deficit is forecast to widen further to 2 percent of GDP in 2009. On the basis of these figures, the gross national debt as a percentage of GDP would rise from 25.1 percent in 2006 to just under 30 percent in 2009. The Institute says that while this would still be a low debt to GDP ratio by both historic and international standards, it is the prospect of it increasing at such a pace that is a concern.
The Institute expects a modest recovery in 2009. Growth in real gross national product is forecast to rise from 1.6 percent this year to 3.0 per cent in 2009. It says that the forecast for growth in 2009 is based on the expectation that services exports will continue to grow strongly, as they have done in recent years but admits that data on the services sector is not as reliable as it would wish.
|The ESRI says that the headline figures on employment growth hide a much more dynamic picture at a sectoral level. Although zero net employment growth is forecast for 2008, this consists of an extra 19,000 jobs in services and 19,000 less in industry, including construction. For 2009, the net figure of 23,000 is made up of 29,000 added jobs in services and 6,000 fewer jobs in industry, including construction. Underpinning the forecasts is a somewhat optimistic view of how those individuals losing jobs will be able to react, for example, through exiting the labour force, returning to home countries in the case of immigrants, or finding jobs in the areas of employment growth. Should this view prove to be overly optimistic, then the current forecast for the unemployment rate would rise. |
The ESRI projects that 24,000 people will be added to the workforce during 2009. However, the rate of unemployment will continue to increase in 2009 and will reach 6.2 per cent. For both 2008 and 2009, our forecasts are based on a rapid slowdown in inward migration.
Some of the main findings of the analysis include:
ESRI expects GNP to grow by 1.6 percent this year. This would be the slowest pace of GNP growth since 1988. The downturn in house building is the main reason for the slow pace of growth. However, more recent developments such as the slowdown in the United States and the appreciation of the euro are now adding to the negative set of factors facing the economy in 2008.
As a result of the slow pace of growth in 2008, ESRI expects no employment growth in 2008. The unemployment rate will reach 6 percent and the rate of net inward migration will slow to 20,000.
As regards the public finances, ESRI estimates suggest that the Exchequer deficit will top €5 billion in 2008. The General Government deficit is expected to reach 1.2 percent on GDP.
For 2009, a modest recovery is expected and GNP growth of 3 percent. The biggest single difference between 2008 and 2009 is expected to be the rate at which house building slows. By 2009, much of the slowdown will have been experienced and house-building will be closer to its long-run sustainable level.
Employment growth should resume in 2009 and ESRI expects to see an extra 24,000 net jobs created. However, the rate of unemployment will continue to edge upwards.
The public finances are expected to deteriorate further in 2009. The Exchequer deficit will rise above €7 billion and the General Government deficit reaching 2 percent on GDP.
In its overall assessment of the economy, the ESRI looks at two issues:
The public finances appear to be in a downward trajectory and it will be difficult for the Government to halt the increasing deficits in 2009. Although a slower pace of current spending growth may be achieved in 2008 relative to 2007, it may be difficult to sustain this in 2009 as the economy recovers and expectations change.
Much of the forecast for growth in 2009 is based on the expectation that services exports will continue to grow strongly, as they have done in recent years. However, data on this sector (and hence analysis) is less well developed than the ESRI would like. The Institute says that this means that it can be less confident on the accuracy of its forecasts for this sector. "If we are overly optimistic for services exports, then we are overly optimistic for the economy too," it says.
"The Decline of the Computer Hardware Sector: How Ireland Adjusted"
Professor Frank Barry (Trinity College Dublin) and Dr. Chris Van Egeraat (NUI Maynooth).
Special Article in the Quarterly Economic Commentary, Spring 2008.
By the late 1990s Ireland had become one of the major European locations for the computer hardware industry. The country accounted for some 5 percent of global computer exports and 6 percent of global electronic components exports. One third of all personal computers sold in Europe are thought to have been assembled in Ireland at that time. The sector has experienced a sharp decline since then as production relocated eastwards to China and Central and Eastern Europe. More than 10,000 jobs - around one third of all jobs in the sector - have been lost over the course of the new millennium.
In this paper, Professor Frank Barry of Trinity College Dublin and Dr. Chris Van Egeraat of NUI Maynooth track what became of the firms operating in the sector and the workers whose jobs disappeared as the sector relocated. The paper includes case studies of a number of the major firms, including Apple, Gateway, Intel, Dell and IBM. Of these five, four remain in Ireland but their operations have been significantly transformed. Intel has consistently upgraded into higher value-added activities. Apple’s Irish operations have largely shifted out of manufacturing and into services. There is a less pronounced shift in the same direction by Dell, while IBM has transitioned to services at both the global and the Irish level.
The case studies also illustrate the various paths followed by displaced employees. Plant closures have occasionally led to high-tech spin offs, as in the case of Digital Electronics Corporation (and more recently in Motorola). Some displaced workers remained employed in their original companies but moved to other higher value-added manufacturing jobs following retraining, as in Intel, or into the newly emerging services jobs in the cases of Apple and IBM. Other displaced workers, as charted in the cases of AST and Gateway, were able to move rapidly into expanding companies in the same locality, serving as an indicator of the value of the skills accumulated in the sector.
The computer hardware sector is atypical in that it is characterised by higher educational attainment and a lower age profile than the manufacturing average. Both of these characteristics suggest that displaced workers would have had better than average chances of finding new employment.
Though the ability of displaced workers to move to new employment relatively easily was undoubtedly assisted by the overall buoyancy of the economy over the period, the adjustment problems associated with churning and displacement in sectors of this type appear to be substantially less burdensome than in traditional lower value-added sectors.
The thrust of the various strands of evidence drawn upon is to suggest that the flexibility of the labour market will be enhanced by the increasing educational attainment of the workforce and a concurrent expansion in the share of modern higher-technology sectors.