Amid the gloom and doom about the health of the global economy, data on the Republic of Ireland continue to show the strength of the domestic economy.
Following last year’s torrid rate of growth in real gross domestic product (GDP) of about 11%, the economy will expand by about 7% in 2001.
The Irish economy is losing momentum as a natural rate of easing is combined with the impact of external factors including the economic slowdown in the US and the outbreak of foot and mouth disease.
The moderation in the rate of economic growth from 11% to 7% represents the largest annual incremental change in Irish economic growth since 1995.
But despite this, Ireland will still deliver GDP growth in excess of its international peers.
Falling labour supply to constrain economy
The most important domestic factor reducing the rate of Irish economic growth in 2001 and beyond is the ever-tightening labour market conditions. The latest National Household Survey is for the second quarter of 2000. It shows that labour force growth slowed to 2.5% year-on-year compared to 5.2% year-on-year in the final quarter of 1999.
This is virtually all due to a levelling off in the rise in the labour force participation rate. Ireland’s labour force participation rate, most notably among females, has now reached the European Union (EU) average.
Not surprisingly, the slowdown in labour force growth has been accompanied by a marked deceleration in the pace of employment growth. This fell to 3.8% year-on-year in the second quarter of 2000 from 6.6% a year earlier. Rapid employment growth in recent years has been made possible not just by strong labour force growth, but also by declining unemployment.
However, the unemployment rate has now fallen to less than 4% from a high of 16% in 1993. The unemployment rate is now below 3% in Dublin, while the long-term unemployment rate stands at just 1.4% nationally.
Inward migration remains relatively moderate and shows no signs of accelerating in response to the large number of job vacancies in Ireland. This may reflect the fact that the UK enjoys virtually full employment while mainland EU has experienced strong employment growth in recent years.
Budget to stimulate demand in 2001 as surplus likely to fall short of target
Despite the less favourable factors and trends, the stance of macro-economic policy remains stimulatory. The tax cuts and social welfare increases announced in the budget were remarkably generous, boosting real personal disposable income by almost 4% this year. Current and capital expenditure will rise rapidly in 2001, providing another boost to the economy.
The original budget target was for a general government surplus of 4.3% of GDP. This compared with last year’s surplus of 4.7% of GDP. It now seems likely that the surplus will be lower than expected at 3.8% of GDP.
The expansionary nature of the budget earned Ireland a formal recommendation from the EU Commission/Council of Ministers in February. Ireland is not in breach of the Stability and Growth Pact but is in technical breach of the Broad Economic Policy Guidelines, which do not carry any penalty mechanisms.
The Commission was seeking a scaling back in the fiscal stimulus by about 0.5% of GDP. The Irish Government will not alter its fiscal stance for 2001.
However, the outlook for fiscal policy in 2002 is unclear due to the moderation in the rate of economic growth and pressure from the EU to moderate the tax cutting strategy. The cost to the Exchequer of the Government’s special savings scheme has also to be factored into the likely out-turn.
