While the public gaze remains on the banks, employment in some sectors has improved, writes GARRET FITZGERALD
TWO SLIGHTLY contradictory trends have recently emerged in the European economy. Based on data in respect of the seven largest European economies in the EU, the European Commission this week reported faster-than- expected growth in output in the first half of the year. Most striking has been the virtual trebling of Germany’s forecast growth rate for 2010.
But in the second half of the year a combination of recently replenished inventories and a waning of government stimulatory measures is expected to slow growth almost everywhere in Europe. However, the commission believes that a “double-dip” is unlikely.
Public opinion here is currently transfixed by the drama of our unique banking crisis, to such an extent that virtually no attention is being paid to key elements of the real economy, the output and export of goods and services. But it is the eventual growth of these two elements, together with their impact on domestic consumption, that will determine our capacity to resolve the crisis. It is the timing and pace of the recovery in our output that will determine just how rapidly we will emerge from the banking nightmare.
Since the start of this year there has been a remarkable, albeit very narrowly based, recovery in Irish manufacturing output, especially in the “modern”, (which in practice means foreign-owned), sector of manufacturing. This has, however, been confined to chemicals and pharmaceuticals.
In the first seven months of 2010, the value of the output of the chemicals sector – mainly basic chemicals, which in practice means Viagra – has jumped by 30 per cent, by comparison with the immediately preceding seven-month period. The value of the output of pharmaceuticals has also risen by 25 per cent in this period. Employment in these sectors increased by a couple of thousand in the second quarter of last year and has recently been maintained about 10 per cent above its 2008 level.
In the case of the somewhat smaller “traditional” (mainly Irish-owned) sector, the increase in output during this period has been very much smaller, at just over 3 per cent – mainly concentrated in metals and engineering. But it is encouraging that after two years during which output in this sector had fallen by over one-fifth, that downward trend now appears to have been modestly reversed.
There is evidence of increased exports of machinery to Germany, France and Britain, but, somewhat surprisingly, up to mid-year the volume of exports of chemicals and pharmaceuticals remained sluggish. However, as most of the output of these two sectors is essentially for export, one must presume that the second half of this year will see a rise in export volumes.
Outside of these two sectors there has been no recovery in manufacturing employment. We know from past experience that increasing employment after a recession can be a very slow process. At the end of our last major crisis in the 1980s, manufacturing output began to rise in the second quarter of 1986 – but manufacturing employment did not start to recover until three years later.
With respect to services, multinational companies here take their profits mainly in the form of royalties and licence payments and perhaps also business services.
Leaving these aside, we have recently become major net exporters of other services, especially computer services, much of which is produced by domestic firms. Between 1999 and 2008 the net value of such services exported rose tenfold to almost €30 billion, making Ireland a major service exporter in global terms. Despite the recession, during the last two years, this performance was fully maintained, with recent signs of further growth.
Meanwhile, some progress has been made in tackling our loss of wage competitiveness vis-a-vis neighbouring countries. Average hourly earnings in the first quarter of this year were 1.5 per cent lower than 12 months earlier – although mainly in sectors other than industry. In addition to this, hours worked were cut by 2.2 per cent.
What about our national productivity? Measured in terms of Gross National Product, (the value of the output available to us in Ireland after deducting profits of multinationals), output in the first quarter of 2008 was estimated at €18,850 per worker. During the following 12 months there was a drop of about €1,000 per worker. This reflected a fall in output of 13 per cent, accompanied by a lesser drop of 8 per cent in the number of workers.
However, in the following 12 months, to the first quarter of this year, the drop in output was only 4 per cent. But the fall in the number of people at work was slightly greater than this, so there was a small improvement in output per worker, or labour productivity.
Overall, in the first quarter of this year the resources created by the average worker were thus 4 per cent less than had been the case two years earlier – but since the end of 2008 the trend of productivity has moved in the right direction.
The decline in the workforce is still continuing, albeit at only one-third of the rate experienced in late 2008 and early 2009.
Until the recent improvement in output in a couple of industrial sectors becomes more generalised, manufacturing employment will continue to shrink, but perhaps at a slower rate than recently.
There are, however, some sectors where employment has recovered, for example in public utilities, land transport, entertainment, the health service, repairs of equipment, and – interestingly – real estate. Over the 12 months between the first quarter of 2009 and the first quarter of the current year, these sectors secured increases in employment totalling about 11,000. So the employment picture is not uniformly negative.