The Sunday Business Post, 25.02.2007
25 February 2007 By David Clerkin
The economy is at risk of an imminent and ‘‘very serious’’ slowdown due to high wages, an overdependence on construction and a potential collapse in consumer spending, a top European research agency will warn in a major report to be published this week.
The report, by the Munich-based CESifo Group, warns of a clear risk of ‘‘a significant reversal’’ in construction activity.
Combined with the impact on exports from declining competitiveness, this could lead to a sharp fall in growth rates, it says.
CESifo is the leading German institute which publishes the IFO Business Confidence Index. Its reports on EU economies carry considerable weight: they are written by an advisory group of senior economists from across Europe.
A chapter on Ireland in the latest report warns that a property downturn could put pressure on public finances, as tax receipts fall at the same time as demand for social welfare payments increases among unemployed construction workers.
The problems facing the Irish labour force in such a scenario could only be corrected by a significant number of recent immigrants choosing to leave the country, and job creation in sectors not connected to the construction industry, the group said.
‘‘Such a slowdown would also raise the demand for public support of unemployed foreign workers, putting pressure on the Irish welfare state,” the report said.
While inward migration had helped to keep wage pressures down, especially among low-skilled workers, they had also contributed to the continuation of the boom in the construction sector.
‘‘In Ireland, the demand for new housing by migrants is one of the factors contributing to the strong dynamics of the real estate market, hence to the prolonged boom in the construction sector,” said the group. But that boom was close to fading away, the report said.
‘‘The strong rate of expansion and the high market valuation of the housing stock point to the risk of a significant reversal at some point in the near future,” it said.
The report warned that prices of goods, services and labour had risen too quickly, putting Ireland at the top of the EU table for labour costs, and that the economy was particularly vulnerable to a fall-off in global demand for Irish exports.
This exposure, combined with the risk of a property slowdown, means that there is ‘‘substantial macroeconomic risk built into the current state of the Irish economy’’.
The experts warned that the boom could turn into a period of slow growth, as falling consumer demand and a decline in construction activity coincide with difficulty in export markets due to declining competitiveness.
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