Medium Term Less Output And Employment Growth example essay topic

Ireland is a small, open, trade-dependent economy and is one of the fastest growing economies in the developed world. It constitutes around 1.8% of overall output in the Euro Area. Its openness is reflected both in the international mobility of its labour and capital reflected by strong migration ary flows and high levels of foreign direct investment. Its high level of external trade is signalled by a high share of combined exports and imports of goods to Gross Domestic Product (GDP), which was 115% in 2002.

In recent decades the Irish economy has been transformed from being agrarian and traditional manufacturing based to one increasingly based on the hi-tech and internationally traded services sectors. In 2002, the services sector accounted for 65% of employment, industry for 28% and agriculture for 7%. Over the last decade, unprecedented economic growth has seen the level of Irish real GDP almost double in size. There have been many reasons advanced for Ireland's success, which in combination can help explain the exceptionally strong growth rates experienced. They include EU membership and access to the Single Market; Ireland's low corporation tax rate and a large multinational presence; a high proportion of the population of working age; increased participation in the labour market especially by females; a reversal of the trend of emigration toward immigration; sustained investment in education and training; co-ordinated social partnership agreements and a more stable public finance position. Ireland's remarkable growth performance throughout the late 1990's and into the start of the new millennium has led to rapid convergence of output per capita with the EU average which has been driven by exceptionally strong growth in employment.

The rate of unemployment has, as a consequence, dropped to historically low levels in recent years. The rapid growth in the economy and the weakness in the euro exchange rate in recent years has led to price inflation in Ireland rising significantly to around double the rate of the euro area. Irish living standards have increased significantly over the last decade. A recent OECD study found that in terms of GDP per capita, based on current purchasing power parities, Ireland is ranked 4th in the world.

Ireland's GDP per capita in 2001 is estimated at US$30,000, with only the US, Norway and Luxembourg ranking higher. However, it is critically important to note that the use of the GDP measure may not give the most an accurate indication of living standards for Ireland. GDP measures the total output produced by factors of production located in the Irish economy. Therefore it includes the substantial profits made by foreign multinationals, much of which is repatriated. Gross National Product (GNP) adjusts for these repatriations and may give a better indication of income and hence living standards for the Irish case. The difference between the two output measures is stark in the Irish case with GNP accounting for just 80% of GDP in 2002.

Short Term Growth patterns for 2002 varied significantly with real GDP increasing by 6.3%, while real GNP grew by just 0.6%. Our forecasts for this year and next are for output growth well below the economy's potential. Growth of 2.6% in real GDP and 2.4% in real GNP is expected for 2003, followed by rates of 3.1% and 2.9% respectively for 2004. As the economy grows below its potential, the prospects for employment growth in 2003 and 2004 have diminished considerably with rates around 1%. As a consequence the unemployment rate is forecast to rise, averaging 5.0% in 2003 and 5.7% in 2004. The strong appreciation of the euro throughout the first half of 2003, coupled with slower growth in output, is bringing about a strong dis-inflationary trend in Irish consumer prices.

The inflation rate is expected to average 3.8% in 2003 and further moderate to 2.7% in 2004. However, inflation in consumer prices remains high relative to Ireland's main trading partners. Greater pressures on domestic competitiveness are emerging from the strength of the euro. The decision by the UK to postpone euro entry exposes indigenous firms to ongoing trading difficulties as the potential for further sterling depreciation against the euro remains. The prospect of continuing exchange rate pressures necessitates that immediate attention is given to both price and non-price factors in restoring cost competitiveness. This requires that domestic costs be productivity-justified.

The onus in achieving this falls as much on the sheltered sectors of the economy, where price growth has been most resilient, as on the exposed trading sectors. The case for stepping up competition policy and regulatory reform in these sheltered sectors has never been more compelling. Medium Term The economy is quite strong. While in the short-term the outlook is very uncertain, the Irish economy remains fundamentally healthy.

In the medium term it has the potential to grow at 5 per cent a year. Any under performance in the next two years is likely to be matched by a subsequent spurt of activity, returning the economy to its trend growth path from 2005. Services are the activity of the future. The market services sector will play a gradually increasing role in raising output and employment. In the medium-term, less output and employment growth will come from the manufacturing sector. The building sector will not grow significantly, with some fall in output likely later in the decade.

Competitiveness and infrastructure deficit the major challenges. A failure to maintain Ireland's external competitiveness and a failure to deliver the necessary improvement in infrastructure could seriously affect growth in the medium term. A further substantial appreciation of the euro could also pose serious problems for the Euro area and the Irish economy. However, there remains the possibility that the actual outturn would be better than forecast, fuelled by skilled immigration and further infrastructural investment. Key priorities for policy are: Tackling the infrastructural constraint on growth remains urgent. Development policy needs to adjust to take account of the changing roles of manufacturing and services.

The current very substantial investment in infrastructure, funded out of taxation, will benefit future generations. Investment in financial assets in the national pension fund is probably better undertaken when the infrastructural deficit has been dealt with some time in the next decade.