WE HAVE been besieged by bad economic news this year. Abroad, bad banking practices have caused credit to tighten and interest rates to increase. The fall in the value of sterling and the US dollar against the Euro has undermined the ability of Irish enterprises to sell goods and services abroad. At home, house building has tumbled and the numbers out of work have risen rapidly. The public finances have drifted off target as tax receipts have failed to match expectations. Economic confidence has been diluted.
However, the Economic and Social Research Institute (ESRI) Medium-Term Review 2008-2015, published today, insists that the economy’s medium-term future is bright with a real growth rate of 3.75 per cent a year possible over the coming decade. Taking a longer view, the institute predicts that Ireland can continue to outperform its European neighbours in growth up to 2025. On this basis, it estimates that, during the years 2020 to 2025, gross national product per person in Ireland could reach almost 120 per cent of the EU-15 average.
As a small, open, trading economy, Ireland must look to exports to deliver economic growth over the long term. Our home market is simply too small to support the sustained growth in living standards to which the community aspires. Through the boom years of the 1990s, exceptional growth in manufactured exports marked out Ireland’s path to prosperity. But times have changed and growth in the future will be based, not on manufactured exports, but on exports of traded market services, says the ESRI. Already, services exports comprise more than two-fifths of all Irish exports. By 2025, the ESRI projects that market services will account for 60 per cent of Irish value added and 70 per cent of Irish exports.
The shape of things to come is best illustrated by the ESRI’s forecast that business and financial services will employ more than 750,000 people or 30 per cent of the Irish workforce by 2025.
The ESRI’s medium-term assessment shows what can be achieved in the Irish economy over the decade ahead. It is not, however, a gilt-edged guarantee of a return to sustained and solid growth. The performance of the State itself will play a large part in determining whether Ireland can realise its potential for growth in the years ahead.
Ireland’s traditional industrial policy of encouraging the development of manufacturing industry will have to be refashioned to support the growth of traded services. This will require a switch in emphasis from supporting the physical capital needs of industry to meeting the human capital requirements of highly sophisticated services businesses.
More generally, future growth will be driven primarily by productivity growth. The Government’s €184 billion National Development Plan 2007-2013 is a decisive instrument for quickening this. It is crucially important that the Government does not cut back these capital spending commitments. For this would be tantamount to the confiscation of future growth.