Analysis: What toll will loss of competitiveness take on growth, asks Cliff Taylor, Economics Editor.

There has been significant debate about how much the economy has slowed over the past year or so, with different figures quoted in support of each side of the argument.

However, the latest quarterly figures from the Central Statistics Office point clearly to a very significant slowdown, with the formerly high-flying multinational sector now suffering along with the rest of the economy.

The figures are likely to confirm the Department of Finance's plans to reduce its growth forecasts for this year and next in revised forecasts later this month and provide no indication of any relaxation of the pressure on the Exchequer finances.

It is a mistake to read too much into quarterly figures but the latest data for the January- March period, combined with last year's figures, which have been the subject of some revisions, paint a clear enough picture.

The domestic economy stagnated in the second half of last year - even if the Gross National Product figures for that period were unnaturally depressed by lower profit inflows from Irish firms abroad - and this continued into 2003.

GNP in the first quarter of this year was just 0.8 per cent above the same quarter in 2002 and was actually 0.4 per cent lower than during the final quarter of last year.

This is a serious slowdown by any criteria, with GNP rising in two quarters last year and falling during the other two, leaving it virtually unchanged for the year and stagnant during the first quarter of 2003.

While the GNP figures show a consistent trend over the past year and a bit, the figures for Gross Domestic Product (GDP) tell a different story. Unlike GNP, the GDP measure includes the profits of the multinational sector here.

Because these profits were soaring last year - largely due to the pharmaceutical sector - GDP grew by 6.9 per cent in 2002, opening up a huge gap with the 0.1 per cent GNP rise and fuelling the debate about the real state of the economy.

In the first quarter of this year, however, multinational profits fell sharply, reflecting the poor state of export markets and continued difficulties in the information technology sector.

Annual GDP growth in the first quarter tumbled to just 0.5 per cent.

This stalling in the industrial sector is a key sign of economic weakness, with industrial output up just 1 per cent on the same quarter last year. In turn, this is reflected in rising unemployment figures.

Investment is also weak, even if the 12.4 per cent year-on-year fall in the first quarter was distorted by a big Ryanair aircraft order last year.

Meanwhile, exports and imports are both down by around 13 per cent, although this partly relates to the ending of unusual trade patterns with the UK, at least some of which appear to relate to UK-based VAT frauds.

Looking at the other main sources of economic activity, consumer spending has slowed sharply, though in the first quarter is still showed an annual rise of 1.8 per cent, while the growth rate of Government spending has slowed to 4.4 per cent from 9.4 per cent on average last year, reflecting the tighter grip on the Exchequer purse strings.

It appears most unlikely that there has been any recovery in the second quarter, with all the main indicators pointing to further weakness.

The question now is what will happen over the rest of the year. More optimistic commentators believe the economy can start to bounce, in tandem with an international upturn.

There are some signs of buoyancy in the US, but a clear recovery is still awaited. And while such an upturn may quickly benefit exports, it is likely to be some time before it feeds through to employment and investment.

Meanwhile, the toll which the loss of competitiveness will take on Irish growth, whenever the upturn does arrive, is still not clear.

Heading into the autumn, there is thus little cheer in looking at the economic data, with a possible US-led recovery providing the only hope for some recovery moving into 2004 and unemployment set to continue rising for some months to come.