Economic growth weakened significantly in the third quarter of last year, according to new figures from the Central Statistics Office. The figures are unusually difficult to interpret, because of the distorting impact of multinational profit repatriations. However a reasonable reading suggests that growth in most areas of economic activity slowed sharply towards the end of last year.
There has long been debate about what growth measure best reflects the real state of the economy. Gross Domestic Product, which counts the total output of the economy, rose by 6.1 per cent in the first nine months of last year, greatly overstating growth. This compared to a 1.4 per cent rise for Gross National Product, which is calculated after the subtraction of profits repatriated from multinational operations here. The latter appears the more realistic measure of the growth in economic activity.
There will be no improvement in the economy in the early part of this year. International conditions remain poor and the threat of war in Iraq is causing great uncertainty. The main challenge for policymakers is - as far as possible - to hold on to the economic gains of recent years and to try to ensure that the economy is best-placed to benefit when the international upturn arrives.
With this in mind, there are some clear economic issues which the Government needs to address. First and foremost is the rate of inflation and the rising domestic costs which are damaging competitiveness. The Government has committed to tackling some of the important issues, through reforms in insurance, new measures to boost competition and active monitoring of price and inflation trends.
However there is a need for a much greater urgency in pursuing this agenda. Indigenous industry is being badly squeezed - weakness was already evident in the latest CSO figures and the subsequent rise of the euro will have intensified competitive difficulties. If cost pressures cannot be reduced, then the price will be paid through rising unemployment.
Many of these issues are being discussed in the talks on a new national agreement, which are still underway. Signing such an agreement would provide welcome stability. The 7 per cent pay increase over 18 months would represent a slowdown in wage growth, but in an environment of weak global inflation it will not of itself improve competitiveness. Meanwhile it is essential that the reforms promised in return for the expensive public sector pay benchmarking payments are delivered; if the aspirations of progress in this area are not turned into reality then the burden on the economy will be very significant.
Overall, the latest figures from the CSO should cause the Government to sit up and take notice. If steps are not taken to restore our competitiveness, then the gains made in recent years will start slowly slipping away.