Boom or gloom?

As Bertie Ahern claims the 'prophets of doom' have got it wrong about the future of the Irish economy, John Byrne asks four leading Irish economists if, and how, Ireland's economic success will continue.


What are the chances that there will be a major recession in the Irish economy over the next couple of years?

John Fitzgerald: "About even over the next five to six years. The economy is exposed because of the property market, and an external shock, say in the US, could cause a major adjustment to the Irish economy."

Jim O'Leary: "If you're talking about a slow-down in the growth rate of the ecomony, then I think that's highly probable. The economy is currently supported by unsustainable growth in the construction industry and, as a result, the whole economy will slow down.

Paul Tansey: "The next year or so should be okay, because of the SSIAs, the housing market, and high Government spending at the next budget, immediately before the general election. After 2007, the jury is out. The Government will stop spending, the SSIAs will all be paid out and there is a danger of rising energy prices and inflation on the international market."

Jim Power: "Unlikely in the short term. The current momentum will be maintained because of the SSIA, the strength of the labour market, and I don't see a correction in the housing market very soon. In 2008/09, however, the SSIAs will be gone, interest rates will have gone up and the housing market will top out. The quality of the labour market is deteriorating – we're creating lots of low-paid, relatively low-value-added jobs. Most of the employment is being created in construction, public sector and low-level service-sector areas. The economy could be vulnerable to a sharp slow-down."

If we lose more manufacturing industry jobs to China, India and Eastern Europe, what will the effect be on our economy?

John Fitzgerald: "It would be normal for an economy to develop away from manufacturing as it grows richer and more skilled. How rapidly this happens is the question though. At the moment it's happening too quickly, and nobody has noticed because all of these workers can get jobs elsewhere."

Jim O'Leary: "The process of losing manufacturing jobs to overseas markets is a natural process. The real issue is replacing those jobs – how quickly you can do it, and in sectors of the economy that you are sustainable. The problem at the moment is the unsustainable boom in construction, which leads to rising labour costs which in turn accelerates the decline of manufacturing. And when you lose jobs to China, you don't get them back. Losing manufacturing jobs is not necessarily a problem, but losing them on top of an unsustainable boom is."

Paul Tansey: "It's inevitable that we will lose lower-level manufacturing jobs to other countries, but it's important that the higher-end manufacturing jobs are maintained – such as pharmaceuticals, information technology and electronic engineering."

Jim Power: "This decline will continue, and the result will be an increase in low productivity jobs. The work force will remain large but there will be more quantity than quality."

Are we dangerously vulnerable to a decline in the construction industry, and what are the chances of that happening?

John Fitzgerald: "We are, and the chances of this happening are about even."

Jim O'Leary: "Yes. The current rate of growth is unsustainable and is certain to slow down, which in turn will cause an overall slow-down in the economy.

Paul Tansey: "It has to slow down. There just isn't the population to sustain the growth. Who is going to buy all these houses? There will not be a collapse though. It will gradually slow down, level out and then decline."

Jim Power: "Given the demand for houses, a serious correction seems unlikely. But there needs to be a parallel economy, and that's where the neglect of the provision of infrastructure and the provision of public services has been a mistake. There is an inordinate dependency on the housing market in terms of direct employment, and also in terms of indirect employment from the mortgage industry. There is also a huge financial-exchequer dependence on the industry, and the Irish equity market depends heavily on it. Consumer wealth is tied up in houses too."

If we don't produce anything through manufacturing and agriculture, what is the basis of our economy?

John Fitzgerald: "If you look at other developing economies, it's services that are growing. Highly developed economies export more services than goods. However, there will still be high-tech manufacturing such as IT and pharmaceutical manufacturing."

Jim O'Leary: "The notion that you have to produce actual objects, like widgets or carrots, is old fashioned. The manufacturing industry can produce services which can be exported abroad: consultancy, financial services. There are other areas where we can attract investment through our expertise – universities seeking to attract foreign students. The key is the export of services – an economy the size of Ireland has to be based on export, it's too small to rely on domestic demand."

Paul Tansey: "I disagree with the first part of the question – the economy can continue producing high-quality manufacturing jobs such as pharmaceuticals, information technology and electronic engineering."

Jim Power: "We'll end up with low productivity jobs which would be bad. We need to concentrate on key areas such as research and development and biotechnology."