Some observers of our economic scene have been encouraged by the higher level of manufacturing output in October and November last, when the CSO index of manufacturing output was recorded at a level one-eighth higher than in the first half of last year, and almost one-fifth higher than at the peak of our boom in the first quarter of 2001, writes Garret FitzGerald
However, what does not seem to be generally understood is that these official industrial output statistics are greatly distorted by virtue of the fact that in preparing them the CSO is required by international practice to give to each industry a weight in the overall industrial output index that is based on total value added - which includes royalties, profits, and other payments remitted abroad by externally owned firms.
In the Irish case - unique in Europe - these account for up to half of the value added here. To give but one example of the distorting effect of this factor, because of the very high level of profits, remitted abroad, of the Basic Chemicals sector of industry that is responsible for processing Viagra, that sector appears to be credited in our statistics with almost 40 per cent of all Irish manufacturing output - despite the fact that it accounts for only 2 per cent of manufacturing employment and 3 per cent of the manufacturing payroll!
And, because of the fact that in the past three years the output of this sector has risen by over 55 per cent, the over-weighting of this single sector has been artificially boosted by something like 20 per cent the official figures for the overall volume of Irish manufacturing output.
It is broadly correct to say that this single distorting factor accounts for almost the whole of the one-fifth increase in output that the CSO statistics suggest took place between the first quarter of 2001 and the months of October and November last. (Data for December is not yet available).
If the contribution of each sector of Irish manufacturing is instead weighted according to its contribution to the overall manufacturing payroll - which is a much more realistic measure of their significance to our domestic economy - it emerges that a limited recovery of less than 5 per cent in overall manufacturing output between the second and fourth quarters of last year proved insufficient even to bring the overall level of manufacturing output back to where it had been in the first quarter of 2001. The fact is that significant increases in output in five of 28 manufacturing sectors - medicare, electrical machinery, Viagra, software, and wood products - accounted for the whole of the recovery in output during those six months of last year - with half of the other manufacturing sectors still recording declining output during this most recent period for which data is currently available.
To say the least, an improvement limited to five sectors and two months does not carry much conviction.
It should, perhaps, be added that the most recent manufacturing employment data available - preliminary figures for the third quarter of last year - show that the decline in the numbers at work in manufacturing that started in the second quarter of 2001 is still continuing. Employment in this sector is now 13 per cent (32,000) below its peak level of the first quarter of 2001. Since that time, improvements in productivity have been achieved simply by shedding labour.
It may well be the case that output in manufacturing, and in the economy generally, will recover during the course of the current year. But in the absence of strong evidence of a general European recovery, and with the still-rising euro inhibiting sales to the US, this process may take longer than some have imagined.
Furthermore, despite the shedding of manufacturing labour in the past three years, a full year is likely to elapse between the start of a significant recovery in output and a recovery in the level of manufacturing employment.
It is not generally realised that the increase of almost one-third in Irish manufacturing employment that occurred between 1988 and 2001 was quite exceptional in the industrialised world. During the past 25 to 30 years manufacturing employment has fallen everywhere in Europe except in Ireland, Portugal and Greece - in most countries by 30 to 40 per cent. Generally, these drastic reductions in manufacturing employment have been more than offset by increased employment in services, although in Germany, Spain, Sweden, Finland and Belgium the growth of services employment has been insufficient to secure any net increase in total employment.
We can expect some recovery in manufacturing employment here in 2005 as Ireland with the rest of Europe emerges from the recent recession. But, given our reduced competitiveness due to domestic inflation, and the disappearance of the advantage we temporarily enjoyed because of the initial under-valuation of the euro, as well as the emergence of more acute competition for industrial investment from eastern Europe and south-east Asia, it may be optimistic to think that manufacturing employment will in future exceed the exceptional level attained at the height of our boom just three years ago.
Indeed the latest ESRI/FÁS Manpower Forecast envisages manufacturing employment in the year 2010 falling slightly short of its 2001 level.
Will the services sector take up whatever slack may be left by a future slowdown in the growth of manufacturing employment here? Our experience during the closing stages of the Celtic Tiger period offers some encouragement in this respect, for between the first quarter of 1998 and the fourth quarter of 2001 employment in the market services sector grew by 120,000 - a six times greater figure than the increase in manufacturing employment in that period.
Of course, some of that new services employment was a spin-off from continued growth in manufacturing during that period.
In contrast to its downbeat view of manufacturing employment, the ESRI/FÁS report predicts an increase of over 200,000 in market services employment by the year 2010.
Incidentally, it also predicts a rise of almost 150,000, or almost 50 per cent in public employment during this period - in other words a continuation of the process that has increased public employment by 50,000 during the recent recession.
It is far from clear that either the Government or opinion generally are prepared for such a huge extension of the public sector.
All this suggests a much larger shift away from manufacturing as the prime source of economic growth - a key feature of the 1990s - than most people have envisaged likely, and this has considerable implications for our educational system.