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News : Irish Last Updated: Apr 24, 2009 - 5:31:05 PM

Davy says Irish economy is in a painful recession; Calls for a pay freeze in return for tax rebates
By Finfacts Team
Sep 1, 2008 - 8:11:59 AM

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Source: Davy

Davy, Ireland's biggest broker, said at the weekend that the Irish economy is in a painful recession, yet that fact seems to be lost on unions and policy-makers alike. It says talk of re-starting national wage negotiations is a side-show. A deal – which would ultimately mean a healthy increase in pay mainly for the public sector – is both unaffordable and anachronistic. The broker calls for a pay freeze in return for tax rebates.

The country faces much bigger short term issues than national pay talks. In order to prevent damaging our medium term potential any further, a pay freeze is the only option, the broker says.

Davy says the problems in the financial system have not gone away. In fact they have become worse, if anything, over the summer and the situation is not going to improve in 2008. Those problems have spilled over into the real economy; in other words, they are affecting a much broader range of sectors than construction alone as credit is constrained.

Ireland is already in recession

Rossa White, economist at Davy, says: "We cannot confirm Irish recession yet in the narrow, but globally accepted, definition – where the economy shrinks quarter-on-quarter for two straight quarters. But we expect the economy to contract in July-September compared with April-June and the same to happen in the final quarter of the year. However, we will not know that for sure until end-March 2009. Fortunately, there is a better way to see how bad things are already. The US National Bureau of Economic Research looks at four key gauges – payrolls, incomes, sales and production. We can apply the same exercise to Ireland."

  • Payrolls: Employment fell in the second quarter (March-May) by 0.7% quarter-on-quarter or 2.8% annualised. Excluding the public sector, where payrolls remarkably grew, employment slid by 1.2% or 4.5% annualised. Moreover, the Live Register suggests that the labour market has weakened even further since then.

  • Incomes: We do not have timely data, unlike in the US. What is known is that employment is down (see above) but that wages are still growing. After inflation, real incomes will probably decline in the second half of the year.

  • Sales: Retail sales have dropped for five consecutive months and were 3% lower in volume in the first half of 2008 compared with the second half of 2007.

  • Production: Industrial output fell 2.7% in Q2 compared with Q1. Housing starts declined 37% in the latest three months versus the previous three months. In addition, surveys suggest that nonresidential building is also sliding. In private services, the PMI indicator is at a record low, some way south of the break-even level of 50.

Rossa White says taking all these facts together, it is pretty clear that the economy is shrinking.

Economy has been losing competitiveness for years, mainly due to the cosseted public sector

Davy says that the credit boom hid the truth that the Irish economy has been losing competitiveness for years. Our price level is the highest of the 15 countries in the euro area. Wages have caught up with the European average in absolute terms. Unit labour cost metrics look unhealthier, stripping out multinational companies that use accounting tricks to boost value-add booked here. But the best guide to whether Ireland has lost ground or not is to look at our export performance. Ireland's share of exports from the euro area slipped from 5% in Q1 2000 to 3.8% in Q1 2008.

The main culprit for the loss of competitiveness is the expansion of the public sector. In the seven years to the first quarter of 2008, public sector employment (based on the official establishment survey) rose 22% to 368,300. Wages in that sector are not determined by market forces, and productivity is almost impossible to measure.In 2006 (the latest data available), public sector hourly wages were 49% higher than in the private sector. But implicitly, the compensation differential is much larger than that. Public sector employees enjoy more generous pensions and, more importantly, far greater job security.

Workers would pay a lot for that job security in the current climate.

Davy says private sector employment fell sharply in the second quarter, but that is only the beginning of the down cycle. The unemployment rate will hit 7.5% by the end of 2009, and those job losses will materialise almost exclusively in the private sector. Pay rises are simply not on the radar for most workers in the economy: holding on to a job is the only priority.

Time to shelve national wage deals, but principle of pay freeze in return for tax rebates has merit

Rossa White says that the irony is that a "national" wage deal is primarily for the benefit of the public sector rather than the private sector. According to the CSO, there were 551,700 union members in 2007. About 70% or 255,200 of those employed in the public sector were union members. In effect, the deal will cover all 368,300 employed in public services, whereas it is only legally binding to the 300,000 or so union members in the private sector.

"What justification is there for further wage hikes in public services at a time of recession and when the pay gap is yawning? Are those workers really vastly more productive than their private sector counterparts?" he asks.

The answer is no, White says. It is time to shelve the idea of national wage agreements. The government would be better negotiating a deal separately with the public sector, binning the benchmarking process at the same time. As for the argument that the deals have created industrial peace, that is nonsense. Strikes do not happen in an economy growing at 6-7% a year on average, as Ireland did for 12 years.

"Given that workers currently have little bargaining power, we are not convinced that industrial unrest will escalate, at least in the private sector. But there is some merit in drawing on the principles of the original national wage deal in 1987. The economy needs a stimulus. A tax rebate for all workers in return for a lengthy pay freeze and reform of work practices in the public sector has a lot of merit. Let private sector workers negotiate at local level. This solution is neat: households receive a much-needed cash injection and at the same time businesses regain some lost competitive ground through a cut in real payroll costs," Rossa White concludes.

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