THE PACE of economic growth has been slipping since the start of the year. Each new piece of evidence appears to confirm that the economy is doing little more than marking time, there are few signs of a growth rebound on the horizon.
Most commentators had anticipated that 2008 would be a difficult year, as the economy digested an overdue correction in the scale of housing output. Few, however, expected that a series of sharp external shocks would be visited simultaneously at precisely the same time that domestic demand was weakening due to the decline in construction activity. The international banking crisis and the credit crunch it engendered have reduced the growth prospects of all industrial nations. Rising oil and commodity prices have caused inflation to accelerate in all advanced economies. But Ireland has suffered more than most from these external shocks for two reasons.
First, Ireland is a small, open trading economy that ultimately depends on export growth to support living standards at home. As the passing of the recent domestic boom has yet again confirmed, a small economy cannot depend solely on the expansion of its home market to generate long-run growth. The potential for export growth is defined, in substantial measure, by the pace of expansion in the markets to which Ireland sells goods and services. Unfortunately, the change in the international economic climate has diluted severely the growth prospects in all of the principal markets to which Ireland exports.
Second, while the growth in Ireland’s principal foreign markets is now anaemic, the ability of Irish enterprises to hold their shares of these markets has been undermined by the steep deterioration in Irish competitiveness. The erosion of competitiveness in recent years has been induced largely by external rather than domestic factors, most notably, the exceptional decline of both the US dollar and sterling against the euro. With the domestic boom drawing to a close, the correct policy response was to shift resources from the domestic to the export sector of the economy.
While exports – and particularly services exports – put in a remarkably strong showing last year, it is doubtful if this performance can be repeated in 2008. For the effort to shift resources from the domestic to the export sector is being undermined both by the much weaker growth in Ireland’s foreign markets and by the rapid appreciation in Ireland’s real exchange rate.
As a result, the slowdown is likely to be more pronounced and more prolonged. In a presentation to the social partners last week, the Department of Finance stated that economic growth in 2009 is expected to remain modest and a return to more normal levels of expansion is not now expected until 2010. However, in the current overcast conditions, it is crucial that development policy does not become a casualty of the slowdown. The faster physical infrastructure can be upgraded, the quicker productivity growth can be stepped up, the sooner the economy will return to its long-run trend growth rate of 4 per cent.