Economy of the Irish Republic - Case Study Example

Economy of the Irish Republic Introduction: Irish economy has showed a tremendous growth in the recent years in terms of higher productivity, betterjobs and higher living standards. It has become one of the most globally favoured economies with effective external trade and investment system .Ireland has performed well when compared to other European Countries (EU) averages. Factors that underpin Irish economy: But during the past three years (2006 to 2008) period of rapid catch ups has ended and growth has slowed down. Labour productivity levels are high but comparatively low with previous years. Ireland remains a good foreign direct investment zone and is successful in attracting the investment but the real exchange rate has appreciated, which in turn effects the FDI. “Because Ireland is a small country, FDI has a much more important impact than it does in larger countries such as the U.S., which receives much larger sums of foreign investment.” (Berry). The housing market helped helped to sustain growth in the recent years as housing investment has reached almost 16% of GNI, but the market has turned since 2006.on the basis GNI growth is expected to decline from 5% in 2007 to 3% in 2008. The housing market weakness also effected badly on increasing the rate of unemployment from 4% in 2006, to 5.5% in 2008. Ireland enjoyed spectacular growth in tax revenues over the past years but this is affected by the economic declining, the government surplus of 3.5% of GNI has reduced in to .5% in 2007due to the lower property related receipts the real government expenditure has expanded rapidly In the year 2005, Ireland’s employment rates reduced from 14% to 4%, due to the growth in GDP. But in the year 2006 the unemployment rate increased to 4.4% Ireland faces a problem of sustainability from other countries because of the generation gap in population aged over 65, relating to working age population .the current system will unsustainable even with the national pension fund The growth rate in GDP has reached 10%from 1997 to 2000; which in 2005 has reached $169 billion, above the average of EU 25. However, since year 2006 Ireland’s economic growth started to slow down, due to the lower investment spending and more moderate consumption, which is 5.6%, in 2007 at 4.7% and it is projected to slow down further in the coming years. In the past years economic activity remain strong by the strong domestic demand but it is now easing in the short step should be taken to attract the foreign investment. In the longer run, stronger productivity growth and continued increase in participation rates will be needed to sustain a fast pace of real income growth. The easing activity has slow down government revenues and a sharp drop in the fiscal surplus .at the same time the government is committed to a large infrastructure investment programme, and there is strong demand for better public service “The buoyant housing market helped to sustain strong economic growth in recent years as housing investment reached almost 16% of gross national income (GNI), the highest in the OECD. (Policy Brief: Economic Survey of Ireland 2008: What is the Economic Impact of the Housing Market? 2008). Productivity has effected by the lower productivity in construction sector in recent years .better performance will hinge on boosting competition in sheltered sectors and the network industries, on improving the innovation framework and raising education standards further. However, the unusually favourable tax treatment increases the role of housing in the economy and adds to volatility in the housing market. There should be a gradual move towards a more neutral system of housing taxation. Fiscal performance has been strong in recent years but revenue growth has moderated as the economy, particularly the housing market, has weakened. Public expenditure is set to slow but it is important to avoid locking-in expensive commitments, particularly on public sector pay It is believed that the economy will grow by 1.6 percent in 2008, mainly related to the contraction in house building. Growth in the Irish economy in 2008 is forecast to be slower than in any year since 1992. As a result, virtually no change is anticipated in the numbers at work next year while unemployment is projected to rise to 130,000, its highest level for a decade. Economic growth in 2007, at 4.7%, will mark the peak of the cycle. The rate of growth will moderate quite sharply in 2008-09, mainly because of lower investment spending and more moderate private consumption growth. In 2007 domestic price pressures pushed Irish inflation above the euro area average. Price pressures will abate somewhat in 2008, but from 2009, the inflation gap with the euro area will reappear and should remain over the forecast period. A gradual loss of competitiveness will result. Key indicators 2007 2008 2009 2010 2011 2012 Real GDP growth (%) 4.7 2.4 2.6 3.6 3.9 3.9 Consumer price inflation (av; %) 4.9 3.0 2.6 2.2 2.2 2.2 Consumer price inflation (av, %; EU harmonised measure) 2.9 2.4 2.1 2.0 2.3 2.3 Budget balance (% of GDP) 0.8 -0.5 -1.6 -1.7 -1.5 -1.4 Current-account balance (% of GDP) -5.9 -3.8 -2.9 -3.8 -3.8 -4.1 Short-term interest rate (av; %) 4.3 4.2 4.0 4.1 4.1 4.1 Exchange rate US$:€(av) 1.37 1.46 1.33 1.28 1.26 1.25 Exchange rate US$:€(year-end) 1.46 1.39 1.30 1.27 1.26 1.25 Exchange rate¥:€(av) 161.19 151.58 127.44 119.45 115.66 114.74 (Ireland: Economic Data. 2008). Ireland’s economic performance remains strong but warned that the underlying source of this growth has shifted from exports towards construction activity and consumer demand. It said that the current account with the rest of the world has gone into deficit and that in a small regional economy like Ireland, economic prosperity ultimately depends on ability to sell goods and services abroad. The report said that worryingly, productivity growth rates, which were among the highest in the OECD, have slowed, while growth in domestic demand is being financed by high levels of personal borrowing. (Hennigan, 2007). As has been seen above, the Irish economy has been one of extreme growth orientation and resilience and it is seen that the growth rate has consolidated at around 9.5% per year. It is indeed to the credit of this economy that when there was a global slowdown after 2001 events, the Irish economy remained more or less stable without much of the fallouts as experienced by other countries of the EU or other countries in the world. It has been seen that the year 1997 has been a remarkable year for the Irish economy since, for the first time, it registered a surplus during this year. Ireland‘s debt to GDP ratio is set at 28% which is the lowest in EU countries. From the economic point of view, the year 2003 has been an important one, since it marked 30 years of Ireland’s entry into the world economy through EU trading. Ireland has been favoured as the primary trade destination for most countries because of its favourable trading policies and beneficial trade climate with other nations. As a result, it is seen that in Ireland there are large Foreign Direct Investments (FDI), which are very lucrative for the trading partners.” According to the US Bureau of Economic Analysis (2003), the rate of return for US owned companies in Ireland from 1995-2002 averaged 20%, the highest in Western Europe, compared to 14.6% for the Netherlands (the second highest) and 7.6% for the UK.” (Ireland: Economic Profile. 2006). The main factors that need to be considered as underpinning the economy are evident in the following areas: Financial reforms Public spending controls Issues arising out of ageing population Integration of immigrants into the mainstream Maintaining the buoyancy in housing markets intact and increasing it in future Funds in lending operations for housing development and business lending, etc Tax revenue increases Ireland needs to take better care of immigrants In the case of financial reforms it needs to be seen that banks, which play a vital role in the economic stability are now well positioned, capitalized, and are flush with funds that could be used for judicious corporate and individual lending. The profitability of banks is good yet a greater degree of overtness needs to be maintained. Public spending needs to be tightened and disciplined fiscal measures need to be initiated that could bring greater fund availability to government departments. Control needs most to be exercised in pay scales of government personnel and greater efficiencies in spending to be initiated and maintained on a long-term basis for the benefit of economy. As is the case with other OECD Countries, Ireland may face the issues relating to ageing population in the years to come, although it may not be as emphatic as the conditions in other countries of the world. However, it is necessary that Ireland be well equipped to address these problems and the myriad issues this may create in terms of its implications on Pension Funds, Insurance and other aspects The immigrants have proved to be the mainstay of the Irish business and economic scenario. However, their pay scales and living conditions are not at par with standard requirements although their levels of education are higher than local work force. Therefore, it is needed to increase their pay scales and living environments and bring their emoluments and benefits with that of the Irish inhabitant work force. Language seems to be a major barrier and efforts must be taken to bring them into the mainstream of Irish living. One of the main aspects of Irish economy has been its real estate business and housing capital schemes. It is the desire for every Irish person to own a house of his/her own. The government is willing to help them as much as is possible, there has been massive dozes of capital injections into these market segments at present and it is believed, that keeping in view the fact that housing demands would be escalating in the years to come, the sector would remain buoyant, for some time in future. The state of the Irish economy is presently upbeat and large bourses could be used for development and real estate activities. “Lending has been strong, not only for residential mortgages but also for commercial property and the construction industry.” (Economic Survey of Ireland 2008: Financial stability: Banking on prudence. 2008). With falling interest rates and commercial borrowing rates, it is believed that prime lending would gain impetus in the years to come. Add to this, a favourable investment climate and all-round healthy commercial growth, would precipitate a strong investment generation that could further sustain the buoyancy of the economy in future. Among EU Countries, Ireland is considered one of the foremost countries, which has a highly efficient tax collection system, and this is substantiated by tax earnings, which are increasing annually. It is believed that a sizeable part of the Irish population is expatriates who work in the country. It is necessary that their contribution to the country’s economical growth and development are recognized and their working lives are secured. The need to include the immigrant population in the future development plans also needs to be implemented. This would ensure all round economic development of the country in the time to come. Conclusion: From the above deliberations, it has been established that the Irish economy has shed its early inhibitions and downward trends in its economy, which persisted until the 1980’s, and it now well set on the road to high-speed economic growth and development. However, it needs to be ensured that that economic policies and plans that underpin such development plans need to be tempered on scientific and rational principles which are capable of being enforceable on a long time basis. It is also necessary that in order to continue to build Ireland as a sound welfare state, it is imperative to consider the voice of the masses and economic needs of the resident population as well as those of immigrant population in order to present a well-balanced and long-term economic growth road map for the country. Such planning could obviate the necessity for future major modifications and/or structural changes in the fiscal and economic policies which would other need to be constantly reviewed in order to keep pace with changing times and economic climates. Bibliography Berry, Rebekah. US Foreign Direct Investments in Ireland: Making the Most of Other People’s Money. [online]. Last accessed 24 April 2008 at: http://www.lehigh.edu/~incntr/publications/perspectives/v19/Berry.PDF Policy Brief: Economic Survey of Ireland 2008: What is the Economic Impact of the Housing Market? (2008). [online]. OECD. P. 4. Last accessed 24 April 2008 at: http://www.oecd.org/dataoecd/38/12/40448199.pdf Ireland: Economic Data. (2008). [online]. Economist.com. Last accessed 24 April 2008 at: http://www.economist.com/countries//Ireland/profile.cfm?folder=Profile-Economic%20Data HENNIGAN, Michael (Ed.). (2007). Comment: The Irish Economy and the Inconvenient Truth. [online]. Fin Facts. Last accessed 24 April 2008 at: http://www.finfacts.ie/irelandbusinessnews/publish/article_10009014.shtml Ireland: Economic Profile (2006). [online]. Enterprise Ireland. Last accessed 24 April 2008 at: http://www.enterprise-ireland.com/NR/rdonlyres/D0465343-2D1D-43F8-B722-8F620055A4D6/0/EconomicProfileAug06.pdf Economic Survey of Ireland 2008: Financial stability: Banking on prudence. (2008). [online]. Organization for economic Co-operation and Development: OECD. Last accessed 24 April 2008 at: http://www.oecd.org/document/19/0,3343,en_2649_201185_40442323_1_1_1_1,00.html Read More