Once again the Irish economy is set to grow faster than expected, with no sign yet of diminishing competitiveness. The consensus now is that the economy will grow by more than 10 per cent in Gross Domestic Product this year.
Of course, the economy beating forecasts is not something new; indeed, it has become more the practice in recent years. What is unusual is that normally conservative institutions such as the Central Bank and the Department of Finance have revised upwards growth forecasts over recent weeks and months.
A little-noticed revision in the Department's recent annual Economic Review and Outlook is for GDP growth for 2000 to reach 10.3 per cent. That comes just after the Central Bank's revision of the same number to 10.25 per cent in its summer bulletin.
The ESRI, which was one of the closest to the actual figure last year, is also set to raise its number with the publication of its quarterly economic commentary in two weeks' time. However, it will not be predicting double-digit growth.
In contrast, commentators such as ABN Amro's chief economist Dr Dan McLaughlin believe the figure may be as high as an extraordinary 13 per cent.
At the moment, the ESRI's estimate is for growth of some 8.8 per cent, which is likely to rise to 9.5 per cent or so. In common with the other forecasters, the ESRI is having to take into account a range of factors but, in particular, far stronger growth in exports than almost anyone had expected, as well as greatly increased consumption.
Contrary to previous expectations, exports are continuing to grow rapidly. And with imports and exports together making up some 150 per cent of GDP, it is not surprising that unexpected changes would mean large-scale revisions in growth forecasts.
The institutions now estimate that export growth will be around 15 per cent this year, far higher than the previous forecasts. However, initial data for June, released shortly after the publication of the Department's report, show exports up 37 per cent in June alone on the previous year, and up 26 per cent for the first six months of the year on the same period last year.
Dr McLaughlin points out that the value of exports in the first six months rose only 3.5 per cent, which means the growth in volume exceeded 20 per cent. As a result, he says exports are more likely to grow by around 18 per cent this year. If imports grow by around 15 per cent, it implies that GDP will grow by around 13 per cent, he argues.
In addition, a good deal of the growth in imports is in the high-technology sector, items which are generally re-exported. This suggests exports will not slow down to the extent forecast.
Details of exports are only available up to the end of May, but they paint a similar story. The economy is still being driven by large-scale exporting by high-technology and pharmaceutical companies.
The other factor accelerating GDP is the continuing weakness of the euro. The virtual depreciation of the currency has given a competitive boost to states such as Germany and France, which are now expected to grow faster than almost anyone believed possible last year.
In the case of the Republic, the impact has been even more marked because it is such a small, open economy and is so reliant on trade from outside the euro zone. Recent trade data make for very interesting reading in this regard too. According to the latest figures from the Central Statistics Office (CSO), the US is now as big a market for Irish goods and services as Britain, and almost as big as the UK including Northern Ireland. It is thus not surprising that the weak euro has such a huge impact on competitiveness of the Republic.
In June, exports to the US were up some 66 per cent, indicating that the US may be set to take over as our main trading partner. In May, Britain accounted for 19 per cent of our exports, with Northern Ireland taking a further 2 per cent. The US accounted for 18 per cent. Our 10 partners in the euro zone accounted for almost 38 per cent.
Import figures tell a similar story, with Britain accounting for 27 per cent and Northern Ireland 2 per cent, and the US 16 per cent, the same as the euro zone.
Trade with non-EU countries, and the Far East in particular, was up strongly. Exports to Korea, for example, were up 200 per cent which may, in large part, be due to NEC's export of chips.
But the main difference between the ESRI's forecasts and the others is the emphasis on the other side of the equation. Most forecasts are based on the demand side of the economy, simply because that is where the data are. But the ESRI also places great emphasis on the output side, determined by employment and productivity growth.
This is not crucial to short-term forecasting but the ESRI points out that, over the longer term, the ability of an economy to meet demand is crucial. Mr Danny McCoy, the editor of the ESRI quarterly review, says it is now difficult to see how sufficient employment increases can be generated when the economy is so close to full employment. Productivity growth is also very high but is far lower in the services sector, which is very labour-intensive. This means that capacity constraints will put a brake to the exuberance, according to Mr McCoy.
Whatever the outcome, no one is in any doubt that the economy is continuing to expand as rapidly as ever. Productivity is growing by more than anywhere else in the EU and, so far, competitiveness is not suffering. Whether that remains the case if and when the euro turns around or the US economy turns down is another matter altogether.
jsuiter@irish-times.ie
