Contraction in pharma sector causing a 0.5% drag on economic growth

Falling profitability in the pharma sector linked to the so-called "patent cliff" will knock about 0.5 per cent off Ireland's annual economic growth rate this year and next year, the Nevin Economic Research Institute (Neri) has warned.

In its latest quarterly report, the trade union-backed think tank said it remained cautiously optimistic about the outlook for the economy.

However, in the short term, it said growth would remain “sluggish” due to the combined effects of austerity and contraction in the pharma sector, linked to the expiry of several prominent drug patents.

The latter would effectively amount to a 0.5 per cent drag on growth for 2013 and 2014, it said.

The institute also flagged several other potential threats to the country’s tentative recovery, including a weakening outlook in export markets, the continuing overhang of personal debt and high long-term unemployment.

It predicted real gross domestic product (GDP) would grow by 0.5 per cent this year and by 1.1 per cent in 2014.

Its forecast for 2014 significantly undercuts the Department of Finance’s own projection of 2 per cent, and the Economic & Social Research Institute’s prediction of 2.6 per cent.

As the impact of austerity and pharma contraction fades, however, it predicted Ireland would see a return to higher growth levels of 1.8 per cent in 2015 and 3 per cent in 2016, with the latter being ahead of the Government forecast.

'Notable increase'
Neri said it expected 2013 to record a "notable increase" of 2.3 per cent in employment which it put down, in part, to the re-emergence of activity in the labour-intensive industries of accommodation, food and tourism.

It predicted additional increases in growth, investment and “the slow recovery in personal consumption” would drive further employment growth, with rates of 1.1 per cent predicted in 2014, 1.2 per cent in 2015, and 1. 5 per cent in 2016.

Driven by job creation, increases in training places and emigration, it forecast unemployment would fall to an average of 13.1 per cent for this year.

The institute predicted unemployment would eventually drop to a rate of 10.4 per cent in 2016.

However, it warned a high structural or long-term rate of unemployment was likely to remain a “core problem” for the economy for some years to come.

Improvements in the labour market will positively impact exchequer finances, it said, predicting the current account deficit would fall to 4.8 per cent of GDP next year.

However, the institute forecast the Government would still narrowly miss its troika-agreed target of 3 per cent for 2015, coming in at 3.1 per cent instead.

While it anticipated some increases in investment in the economy in the coming year, Neri said the Government’s much-vaunted €6.4 billion strategic investment fund was still not being used to stimulate recovery, which it described as “a missed opportunity”.

The Government announced plans last June to redirect funds available in the National Pension Reserve Fund to the new Irish Strategic Investment Fund for investment in infrastructure and commercial projects.

“It remains a regret that these funds have not been leveraged to support a stimulus to the weak domestic economy,” one of the report’s authors, Micheál Collins, said.

The think tank set aside a significant portion of its report to analyse various trends in the county’s labour market.

It said 20.7 per cent of Irish workers were now classified as low paid, with the cut-off point being €12.20 per hour, ranking Ireland about average in EU terms. Since the recession, low-paid workers were generally working fewer hours per week, despite a preference to work more, the institute said.