Quarterly Bulletin Q3 2013

26
The Domestic Economy
Quarterly Bulletin 03 / July 13
11
10
9
8
7
6
5
4
3
2
1
0
-1
-2
-3
-4
-5
-6
-7
Chart 9: Hourly Earnings in Manufacturing
(in Local Currency)
% Change Year-on-Year
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012e
Ireland Major Trading Partners
Relative Hourly Earnings
Source: Central Bank of Ireland calculations.
Productivity and Cost Competitiveness
The substantial improvements in conventional
measures of productivity and unit labour costs
posted in the aftermath of the crisis, largely in
the 2009 to 2011 period, are unlikely to be a
feature of the economy in the years ahead as
most of the adjustment in employment (mainly
in the private sector) and salaries (mainly in the
public sector) has already occurred.
As has been pointed out before, these
conventional measures overstate the
improvement in competitiveness and
productivity growth which has occurred.
Chart 9 illustrates the evolution of hourly
earnings in manufacturing relative to our main
trading partners, pointing to a closing of the
relative wage gap in 2012. Following estimated
productivity growth of 0.7 per cent last year,
and in light of the overall economic and
labour market outlook set out above, average
annual productivity growth of just 0.1 per cent
on a GDP basis is likely for this year, before
increasing to 1.2 per cent in 2014. In the wake
of a small rise in unit labour costs of 0.2 per
cent (on a GDP basis) last year, absolute unit
labour costs are projected to increase by 1.3
per cent this year before declining by 0.1 per
cent in 2014. The marginal improvement in
productivity is more than offset by projected
increases on the compensation side.
However, according to European Commission
projections, labour cost competitiveness
in Ireland relative to the euro area is set to
improve this year and next.
While competitiveness in the manufacturing
sector has been a critical factor in Ireland’s
competitiveness in the past, a broader sense
of competitiveness is now more relevant
– particularly one that encompasses the
characteristics of the increasingly important
services sectors. According to the CSO’s
Services Producer Prices for Q4 2012, which
covers a range of business-to-business
services costs, the largest year-on-year
increases occurred in air transport (up 5.4
per cent), postal and courier services (up 3.8
per cent) and computer programming and
consultancy (up 3 per cent). Moreover, with
international labour mobility on the rise, the
cost of living is a salient factor – one where
Ireland needs to improve on number of fronts.
While the rate of inflation in Ireland at present
is below that of many of our competitors, the
level of prices is coming from a high base. Ongoing
work of the National Competitiveness
Council (NCC) highlights areas of concern
in regard to our competitiveness and Forfás
recently published its report on Ireland’s
Competitive Performance for 2013, highlighting
a number of areas of concern. In addition to
structural commitments under the EU/IMF
programme, the NCC recommend and stress
the need for improvement in infrastructure,
broadband and planning processes in relation
to property. The loss of skills arising from
long-term unemployment and emigration
are cited as a concern. Moreover, the recent
increase in labour costs, given the high rate of
unemployment, is also cited.
The Public Finances
Overview
The first official estimate of last year’s general
government balance has confirmed that a
significant improvement took place, with the
deficit falling to 7.6 per cent of GDP. The
underlying deficit - which excludes capital
injections into financial institutions and is the