The underperformance of the Irish equity market this year is being partly attributed to a growing fear among international investors that the Irish economy is heading for a crash landing. British investors and economists, in particular, believe that many of the cocktail of ingredients that eventually caused the British economy to implode at the end of the 1980s are present today.
They point to runaway house price inflation, a consumer boom, tax cutting budgets and the inappropriately low level of interest rates. The term "tiger economy" has also lost much of its allure in recent times as the Asian tiger economies have been crippled by recession since 1997. Some believe a similar fate awaits the Celtic Tiger.
Irish economic growth averaged 8 per cent per annum in the period 1994-98, more than double the rate of growth achieved in previous decades. The prophets of doom fail to appreciate a key feature of this acceleration in growth. It has been made possible by exceptional growth in employment, which has averaged 5 per cent per annum since 1994. Productivity growth, on the other hand, has remained steady at around 3 per cent per annum, in line with the trend in recent decades, but well above the EU average of some 2 per cent.
Total employment rose by 334,000 or 27.5 per cent in the 1994-98 period. The labour force, though, grew by 15 per cent or 219,000 over the same period. The difference is accounted for by a fall of 116,000 in the number of unemployed persons. A falling jobless rate then has accounted for more than one-third of the rise in employment since 1994.
Three other factors have also been at work in boosting employment. Firstly, favourable demographics as large numbers of young people entered the labour market. Secondly, rising female participation rates. Thirdly, a turnaround in migration flows with inward migration in recent years compared to large outward migration in the 1980s.
Thus the Irish economy is not a bubble economy. Large inflows of foreign direct investment combined with a large pool of available labour have temporarily lifted the potential growth rate of the economy to around 8 per cent. Hence, the economy has not been bedeviled by rising consumer price inflation and a blow-out in the balance of payments as happened in Britain at the end of the 1980s.
Furthermore, membership of the euro means the economy is not about to be brought to a screeching halt by a sharp tightening of monetary policy, as happened in Britain when interest rates were jacked up to 15 per cent in 1990.
Employment growth, however, is set to slow with the economy approaching full employment and the trend in demographics turning less favourable. It should be accompanied by a slowdown in economic growth. This will be a gradual process and, in our view, may have already gotten under way. GNP growth reached 9 per cent in 1997, the year which recorded the largest increase in employment. Last year saw a modest deceleration in the GNP growth rate to 8 per cent.
I expect growth to decelerate further this year with GNP rising by between 6 and 7 per cent. Most of the economic data published for the first half of 1999 support this forecast. Export growth has slowed dramatically to around 13 per cent from 24 per cent in 1998, judging by data available up to April. Growth in manufacturing output has slowed to 9 per cent year on year from 17 per cent in the previous two years. All the indicators of construction activity also point to a slowdown in output growth.
The Central Statistics Office has just published population and labour force projections for the period to 2031. These point to a moderation in labour force growth in the coming decade. Growth in the labour force, which is estimated at 2.9 per cent per annum for the period 1996-2001, is projected to slow to 1.75 per cent per annum in the period 2001-06 and just under 1 per cent per annum in the period 2006-11.
These projections are based on the assumption that net immigration continues but at a diminishing rate. Slightly lower labour force growth projections are derived, if it is assumed that net immigration tapers off to zero.
With the economy virtually at full employment, employment growth is entirely dependent on an expanding labour force. Given trend productivity growth of around 3 per cent, the CSO projections suggest that the economy has the potential to grow at a rate of around 5 per cent in the first half and 4 per cent in the second half of the coming decade.
Government policies are being honed to ensure such a growth rate is achieved, through increasing capital expenditure in particular. Rumours of the demise of the Celtic Tiger, it would appear, are greatly exaggerated.
Oliver Mangan is chief bond economist at AIB Group Treasury
