IRELAND requires a “swift improvement in its competitiveness” if it is to avoid a prolonged period of depressed economic activity, the National Competitiveness Council (NCC) warned in a report yesterday.
The NCC, which is tasked with advising the Taoiseach on key competitiveness issues, has identified a range of areas in which Ireland is underperforming its key trading partners, and has urged that the cost of doing business here must be reduced.
Non-pay costs such as utility prices and professional fees were found to compare poorly with those in competitor countries. Moreover, the cost of State-provided services such as public transport and education continues to rise rapidly, even though overall consumer prices are falling.
“Difficult decisions are necessary to restore our international competitiveness,” NCC chairman Don Thornhill warned in the report.
“Without appropriate action, it is entirely possible for the Irish economy to enter a prolonged period of depressed economic activity and for the convergence of Irish living standards on other high-income countries to unwind.”
His comments came as the International Monetary Fund’s chief economist Olivier Blanchard said the global economy was beginning to recover from the worst recession since the second World War.
Mr Blanchard said most countries would see positive economic growth for the next few quarters, although probably too tepid to reduce unemployment, which is not expected to crest until some time next year.
However, he noted that much of that growth was predicated on fiscal stimulus and inventory rebuilding, both of which will have to come to an end, and the stimulus comes at a cost to future growth.
Although there are tentative signs that Ireland’s competitiveness is starting to improve, this is mainly due to a cyclical fall in prices, rather than any structural reform of the economy or its cost base, which remains high. Ireland’s cost competitiveness – which measures the ability of businesses based here to compete internationally – deteriorated rapidly in recent years as the domestic boom pushed up the cost of doing business here.
The report shows that Ireland experienced a 35 per cent decline in international price competitiveness between January 2000 and April 2008.
The NCC said that export-led growth must be targeted in order to secure Ireland’s long-term prosperity. However, if the economy is to make a successful transition from its current reliance on domestic demand, then costs, professional fees, rents and incomes must be brought down to levels seen in competing countries. “Ultimately, a quick adjustment in the price level is preferable to a gradual decline over several years,” the NCC advised in its report.
Although such an adjustment will be painful, it warned that the alternative is a prolonged period of weak or negative economic growth, high unemployment and the emigration of many highly educated young people.
The report found that Ireland has the second most expensive industrial electricity prices of the original euro zone states, and that broadband services here are relatively slow and expensive.
The inflation rate of certain State-provided “administered services” such as public transport, health insurance and education, is expected to average 13.2 per cent this year. Furthermore, growth in productivity levels (which can help to offset higher costs) was found to be relatively low between 2004 and 2008.
Ireland’s export sector has held up relatively well, but the fall in the value of sterling represents a significant challenge for indigenous exporters focused on the UK market, the report said.
Access to finance was also identified as a significant threat to the competitiveness of Irish businesses. “The turmoil in global financial markets and the exposure of Irish banks to bad loans in the declining property sector is affecting Irish firms in terms of their ease of access to finance and its cost,” it said.
The cost of credit was also identified as a problem, as the majority of loans in Ireland were found to be more expensive than the euro zone average in the first quarter of 2009.
The NCC will later this year publish a second report examining in more detail the challenges facing Ireland. The NCC was established in May 1997 as part of the Partnership 2000 Agreement.