Earlier in the year in this column Garret FitzGerald cast some doubt on current growth forecasts for our economy.
In particular, I expressed surprise at the failure of commentators to address the sharp falling off in the growth of labour productivity that has been a consequence of the quite dramatic switch from industry to services as the principal motor of growth in our economy since 2001.
In its Summer Economic Commentary, the Economic and Social Research Institute estimated the growth of Gross National Output in 2004 at 5.8 per cent and forecast a 5.4 per cent growth rate for the current year. This was followed in August by a Department of Finance report expressing a similarly optimistic view about the performance of our economy in the current year - projecting growth at 5 per cent.
I find it hard to reconcile this optimism with the published statistical data. In July the CSO published its first figures for growth last year, estimating the rise of GNP in 2004 at 4 per cent. That official estimate is almost one-third lower than the ESRI's most recent figure for 2004. Moreover, the CSO shows our annual growth rate to have declined further in the most recent 12-month period - the 12 months to last March - down to 3.2 per cent.
In order to achieve the ESRI's forecast 5.4 per cent growth rate for the 12 months to next December, it would now be necessary for the growth rate between April and December this year to have accelerated to almost 6 per cent. But that would involve a virtual doubling in this period of the growth rate that was achieved in the most recent 12-month period for which we have data.
Now there may be reason to believe that there will be some recovery in national output during the last nine months of this year, but I am not aware of any evidence to suggest that our economy has since last March achieved, and is likely in the autumn months ahead to sustain, a virtual doubling of our most recent rate of growth. The only solid data for the period since last March is that relating to manufacturing output in the second quarter of the year, when output was running only 1 per cent higher than in the same quarter of 2004.
The other aspect of our economic performance which I find worrying is the very slow growth of labour productivity since 2001 - as well as the levelling off of the decline in our dependency ratio. It was a combination of these two factors that gave us the huge annual increase in output per head of population during the 1990s, which enabled us to catch up on the rest of Europe, raising our output per head from just over 60 per cent of the average for the 15-member EU to slightly above that average. Our capacity to achieve a sustained growth in the per capita resources needed to enable us to resolve our social problems and improve our public services depends entirely on these two factors.
During the Celtic Tiger period, output per worker rose by an average of 4 per cent a year. The equivalent figure for the last four years, and for 2004 itself, was 1 per cent. The key reason for this sharp deterioration in the growth of labour productivity has been the levelling off of manufacturing activity - for it is primarily through high investment in industrial technology that big increases in productivity are secured. In sharp contrast to the industrial sector, most services - from which the bulk of our economic growth now derives - are labour-intensive; they do not lend themselves to the kind of investment that raises productivity. Indeed last year labour productivity in services actually fell slightly, reflecting a very substantial inflow of low-paid workers from Eastern Europe.
The second key element - and in fact somewhat more important source of growth of output per head of population in the 1990s - was the fact that during that decade so many people who had previously been dependants of workers became workers themselves. This switch from dependant status to worker status by hundreds of thousands of our people between 1993 and 2001 actually accounted for a bigger share of the increase in Irish output per worker than did improvements in worker productivity. I have been hammering away at this point for years, yet it rarely features in Irish economic commentary, or indeed in discussion of our economy by outside observers. Let me explain in simple terms how this process worked.
In 1993, an average group of 100 Irish workers "carried" 219 dependants, either as members of their own families or as recipients of state aid (unemployment payments, pensions, child benefit etc), financed by taxation of the incomes and spending of these workers. But by the start of the present decade this ratio had improved dramatically to only 123 dependants per 100 workers.
Now if you divide the pay of 100 workers in 1993 (say €1 million) by 319 - the 100 workers and their 219 dependants - the average per person is €3,125. But if you divide it by 123, you get €4,480. So, even if output per worker had not increased at all during that period, income per head for 100 workers and those dependent on them would have increased by 43 per cent.
In fact, output per worker did increase during this period by 4 per cent a year, or 37 per cent per head between 1989 and 2000, and it was the combination of these two factors that almost doubled Irish output per head during that extraordinary period. But note that over half of this extraordinary achievement, which has no parallel elsewhere in Europe, was due to the way in which we converted dependants into workers rather than into higher productivity.
The trouble is that, despite the continued growth of employment, this rapid reduction in our dependency ratio has come to a virtual halt since 2001 - as has the growth of labour productivity. As a result, the rate of increase in Irish output per head has fallen back from almost 9 per cent a year to an annual 2 per cent.
I have drawn attention to this aspect of our economy for several years and I find it puzzling that this almost overnight collapse in the growth of Irish per capita output is hardly ever referred to or discussed by other commentators on our economic situation.