'Dual economy' row rears its head

ANALYSIS: On and off over the years there has been a debate about the "dual economy" in Ireland. On one side stood the rapidly growing high-tech companies; on the other the lacklustre domestic economy. It was an argument that appeared irrelevant during the boom years, when the entire economy was doing well. But now it is back.

Just look at what was happening during the third quarter of last year. The main domestic economic indicators were generally flat to weak, consumer spending was stagnating (although staying 2 per cent plus ahead of 2001), investment was weakening and the output of indigenous industry was falling.

Gross national product (GNP) was 0.3 per cent lower in the July-September period, compared to the same months in 2001. Looking at the first nine months, the growth rate was a paltry 1.4 per cent.

Parts of the multinational sector were operating in a parallel, but very different, economy. Exports stormed ahead, driven by the chemicals sector, pushing up gross domestic product by 6.9 per cent. But the amount of money being repatriated back to parent operations also soared. The rapid export growth was, therefore, not reflected in GNP - a separate growth measure that subtracts profit outflows to try to gauge real levels of economic activity. The economy was not getting a bang for the export buck.

Measuring the timing of profit repatriations is difficult. However, it appears likely that at least some multinationals here are engaging in "transfer pricing" - arranging the price of their inputs and outputs to maximise their profits here to benefit as fully as possible from our low corporation tax rate. The US tax authorities may take note.

The GNP indicator is thus the better measure of real activity, noting the CSO warning about reading too much into one quarter's figures.

As reflected by the GNP data, the trends in the main domestic economy look generally poor, meaning that growth overall last year could be in the 1-2 per cent range and the outlook for this year is not good.

Much will depend on the international picture. However, there are worrying trends. The euro's rise is squeezing exporters to the US and Britain, and rising domestic costs will do the same, particularly in an environment were overall international prices for many goods and services are flat or falling. The prospect of war in Iraq is holding back investment and consumer spending growth is slowing.

One of the few strong points in the national accounts was a 7 per cent rise in housing investment, driven by new house building. This was reflected in Central Bank figures showing strong mortgage lending late last year. But if the economy continues to stall, even house prices will be vulnerable.