After seven years of record-breaking economic growth, Ireland's "Celtic Tiger" economy is showing signs of cooling down. In 2000 Ireland had the fastest growing economy among the world's industrialized nations, outpacing all other OECD members with an estimated 11.5 percent growth in gross domestic product (GDP), and 9.75 percent GDP growth in 1999. The Irish Central Bank predicts a growth rate of 6.5 percent for 2001, which, although lower than in previous years, is considered to be close to a sustainable rate of growth. Last year's significant expansion in output was driven by strong domestic demand and impressive external trade performance. The deceleration on growth, as witnessed in the first six months of 2001, reflects the impact of a slowdown in the U.S. economy and effects of animal health problems. Ireland's dramatic transformation from a largely agricultural and manufacturing based economy to a services, pharmaceutical and information technology economy has resulted in Ireland's jump into second place in the EU in terms of per capita income. Irish per capita GDP in 2000 was $24,500. Forecasts for 2001 estimate that GDP per capita will reach an all-time high of $27,600.
In 2001, the economy will continue to grow. The Irish Department of Finance projects strong economic growth in fixed investment throughout 2001, supported by continuing high levels of business confidence and low interest rates. Consumer spending is forecast to increase by 8.75 percent in 2001. Buoyant tax revenues have created a substantial overall treasury surplus for the first six months of the year. Fiscally,the 2001 general government balance (GGB) is expected to be in surplus. The ratio of Ireland's foreign debt to GDP continues to fall with the debt/GDP ratio forecast to decline to around 32.3 percent by the end of 2001. Foreign direct investment (FDI) steadily increased throughout the 1990s and is expected to continue into 2001. FDI grew to 22.5 billion euros ($21.4 billion) in 2000 from 17.8 billion euro ($16.9 billion) in 1999.
After almost seven consecutive years of rapid economic growth without serious inflationary pressure, Ireland's inflation rate began to rise upwards in the last quarter of 1999 and spiked soon after, in 2000. The Irish rate of inflation, as measured by the Harmonized Index of Consumer Prices (HICP), peaked at 6 percent in October and November, and the average for the year was 5.3 percent. Ireland's annual inflation rate was the highest in the euro currency area and almost twice the EU average. Inflation in Ireland has fallen to approximately 5 percent in recent months but remains stubbornly high, mainly because of external factors, such as high oil prices and the falling value of the euro.
Ireland is a full member of the euro-zone and the Irish pound, which will cease to circulate in January 2002, is irrevocably fixed at a rate of Irish pound 1.2697 against the euro (1 euro is worth IP 0.787564). The euro has fallen in value against the dollar and sterling since its launch. As a result, Irish exports are relatively cheap when sold in U.S. and U.K markets, and U.S. imports into Ireland are relatively more expensive. As a member of the euro-zone, the Irish Central Bank has almost no control over Irish interest lending rates, which remain low for an economy approaching a decade of economic expansion. In May 2001, the European Central Bank cut interest rates in the euro-zone, bringing the rate for the main financing facility to 4.5 percent, while also reducing rates on the marginal lending facility and the deposit facility to 5.5 percent and 3.5 percent, respectively.
Employment growth has averaged 4 percent since 1994, leading to a fall in the rate of unemployment from an average of 15.6 percent in 1993 to just over 3.7 percent in March 2001. The fourth quarter labor force figures for 2000 indicate that there are a total of 1,779,100 persons in the Irish labor force, of which 1,710,300 are in employment and 68,800 are unemployed. The long-term unemployed represent about 35 percent of total unemployment.
It is not just economic good luck that turned the Irish economy into a "Celtic Tiger." Factors such as tough cuts in government spending dating from the late 1980s, associated with a series of "National Wage Partnership Programs" negotiated between the Government and the private sector, which helped usher in a period of cooperative industrial relations. Reductions in taxation rates and targeted Irish government programs attracted foreign direct investment in key economic sectors such as computers, financial services, and pharmaceuticals. All contributed to the rapid economic growth Ireland has enjoyed since the early 1990s. In addition, European Union (EU) funds, received since Ireland's 1973 EU accession, assisted Irish governments in making needed structural planning reforms, as well as in improving Ireland's infrastructure in key sectors.
Ireland's economic success shows no signs of evaporating in the near term -- growth rates, unemployment, government debt ratios, and consumer confidence all remain positive. There are, however, threatening clouds on the horizon that will need to be watched, if the Irish government's goal of negotiating a "soft landing" for the Irish economy -- annual growth rates of 4-5 percent -- is not to turn into a "harder landing" or actual retrenchment.
The most threatening storm cloud is inflation. The fear is that it conceivably could soar so high as to spark a wage-price spiral similar to that experienced in Ireland in the early 1980s. Irish economists and government officials hold mixed opinions. For some, the spike is a short-term reaction to external factors -- such as oil price increases, recent tax increases on items like cigarettes -- and the strong pound which makes imported goods from Ireland's largest trading partner, the UK, more expensive. For others, this is the start of a longer trend, fed in part by labor shortages and serious capacity constraints, which will significantly slow down the Irish economy and spark a wage price spiral.
Whatever the fundamental causes, the higher inflation rate is already producing cracks in the seams of the most recent national wage agreement, "The Program for Prosperity and Fairness," agreed to by government, business, and labor in April 2000. Irish labor unions argue that wage increases negotiated as part of the agreement are being eroded by the rising rate of inflation and they are demanding that the government take action to reduce inflation or reopen the wage rates agreed upon in the national wage program (see Chapter III, "Ireland's National Partnership Programs" for further background). To date, agreement has been reached on a one-time payment, which compensates workers for rising inflation. However, if the partnership agreement unravels, and inflationary pressures continue, there is a risk the subsequent rise in wage rates will hurt Ireland's international competitiveness and, ultimately, spark an economic slowdown in the export sector of the economy.
Related to the inflation worry are the growing labor shortages in Ireland. Many commentators suggest Ireland is at "full employment." Skill shortages are now apparent, especially in fast-growth sectors as information technology and other sectors dependent on seasonal, low-skilled staff, such as tourism and construction. It is estimated that there are 60,000 unfilled jobs in the Irish economy and that Ireland will need to attract 270,000 employees into the workforce over the next six years to sustain even modest levels of economic growth. The national training agency, FAS, is actively recruiting overseas in an attempt to add to a stretched labor force. Successful efforts are being made to boost the numbers of women, particularly older women, participating in the labor force. Ireland's pool of talented, English-speaking workers has been a prime attraction for the foreign investors and multinationals that have fueled much of the economic growth of the last decade.
Principal Growth Sectors
(A) Manufacturing
The manufacturing sector in Ireland provides employment for approximately 27.5 percent of the Irish working population. Official figures show that the Volume of Production Index for the manufacturing sector rose by 15.1 percent in 2000. National accounts data for the third quarter of 2000 show that the value of industry output was 12.3 percent higher than in the third quarter of 1999. Figures from the NCB Purchasing Managers Index (an indicator designed to provide an overall view of manufacturing conditions) signaled further expansion in the Irish manufacturing economy in the first quarter of 2001. However, the rate of expansion was marginal and the weakest seen in the three-year survey history. Primarily foreign-owned enterprises in the high-technology sector (especially computer and pharmaceutical concerns) were responsible for manufacturing sector growth in 2000. The tight labor market is expected to constrain growth in the near future.
(B) Services
Ireland has a small but rapidly growing services sector. In 1995, the sector represented 58 percent of total employment, by mid-2001 service sector employment had grown to just over 1.1 million, or 62 percent, of the total workforce. The private sector accounts for 71 percent of all service jobs, with the remainder in the public sector. The services sector is anticipated to have grown at about 9 percent in 2000. The bulk of the increase came from the private sector, given a modest rise in the volume of output from public services. The effects of measures to prevent hoof and mouth disease within Ireland are likely to have a significant impact on the output of this sector in 2001. Volume growth is forecast to rise by 5.4 percent, declining to 4.8 percent in 2002.
While the IT sector in Ireland has grown rapidly in recent years, there is significant opportunity for further growth. Recent technological changes are enabling the development of the sector. The growth of the Internet has created opportunities for a wide range of new applications and services, and for the globalization of existing businesses. Advances in digital and mobile technologies are fueling development and growth in the content sector. Moreover, the Irish Government's aggressive rollout of high bandwidth telecommunications provides a necessary infrastructure for knowledge-intensive industry. A recent Irish government strategy report on services industries highlighted that the internationally-traded services segment offers the greatest opportunity for job and export growth. While the impact of the "dot-com" shakeout has been felt in Ireland with many large multi-national companies shedding jobs, FDI in the sector remains strong. There is little fear of a flight of digital capital.
In 2000, the internationally-traded services sector in Ireland generated annual export sales of $15.6 billion. In the balance of payments, the deficit in services widened by 36 percent. While the net tourism and travel surplus rose substantially, the net outflow on royalties and licenses and other services (a reflection of the strength of activity by the multinational sector) was substantial, bringing the services deficit to 14.6 billion euro ($14 billion). The overall services deficit is expected to further widen in 2001.
(C) Agriculture
The value of agricultural output is estimated to have fallen by 1.6 percent in 2000, largely reflecting lower output in the livestock sector. Favorable price developments for a broad range of agricultural outputs were sufficiently large to more than offset these negative volume trends. In particular, livestock prices were notably stronger than a year earlier. Cattle prices, for example, were almost 12 percent higher than in 1999. In addition, double-digit price increases were recorded in the pig and sheep sectors, partly reversing the sharp reductions recorded in these sectors during 1999. The value of goods output in the agricultural sector was 4.7 percent higher in 2000 than 1999. The outlook for the agricultural sector for 2001 is more uncertain than normal, reflecting the problems associated with animal health. Following the resurfacing of BSE difficulties in November 2000, beef consumption fell by around 30 percent in the EU. Restrictions on animal movement imposed in order to contain the spread of hoof and mouth disease are likely to have had a negative impact on farm incomes in the early months of 2001. Since mid-2001, the risk of outbreaks appears to have diminished and the various restrictions are being relaxed. In these circumstances, the outlook for the second half of the year remains broadly favorable, with the sector likely to benefit from the strength of demand in the UK. Outside the livestock sector, the outlook remains relatively favorable. In the dairy sector, for instance, some increase in output is expected, reflecting the second quota increase under the Agenda 2000 reforms.
Government's Role in the Economy
Over the past decade broad political support has developed for reducing the Irish government's role in the economy. This represents a significant change from early economic policy in Ireland, which, for most of modern Ireland's existence, was premised on the need for the government to protect national industries through tariffs and subsidies, as well as have the primary role in key sectors of the economy in areas like energy, communications, and transportation.
Today, the Irish government's direct role in the economy is sharply reduced and limited to the state's remaining ownership of certain key industries, for example, the state-owned airline Aer Lingus, the state-owned electricity distributor ESB, and Bord Gas, the state-owned natural-gas distributor, all of which the government intends to privatize in the next few years. As the government moves to privatize these industries and introduce greater competition into the energy and transportation sectors, it has created, pursuant to legislative mandates, state-appointed authorities to regulate these sectors and ensure protection of the "public interest." U.S. Embassy Dublin estimates that the share of GDP which is state-owned or produced is less than 3.5 percent and declining.
For the past decade, the Irish Government has pursued a cautious fiscal policy designed to bring Ireland into conformity with the criteria for introducing the EU's euro currency. By lowering the annual budget deficit and the overall level of national debt, government policy created a macro-economic climate favorable to direct foreign investment and private sector growth. This has been facilitated through social partnership agreements among the government, labor and employers; these have held down wage costs. The most recent centralized wage agreement, the "Program for Prosperity and Fairness", was concluded by representatives of government, labor unions, employers and farmers in April 2000 (see Chapter III, "Ireland's National Partnership Programs").
As in the UK, Ireland's labor market generally is thought to be more flexible than that of its EU colleagues on the continent. Nonetheless, Ireland has supported the development of a social framework for its economy in accordance with European standards and, in comparison to the U.S. tradition, there is relatively greater government regulation of the workplace and labor relations.
(A) Ireland and the EU
The EU role in the Irish economic boom cannot be underestimated. During the period 1994 to 1999, Ireland received more EU funding per capita than any other EU Member State, with EU fund transfers to Ireland representing, on average, approximately 3.5 percent of GDP for the period. EU transfers to Ireland will be reduced substantially as Ireland's per capita GDP now exceeds the cut-off for certain types of EU funding, and the expected accession to the EU of new member states will reduce the amounts available to current members.
The present structural funds programs will allocate 3.7 billion euro in EU Structural and Cohesion funding to Ireland in the period 2000-2006. In attempting to maximize the transfer of funds from Brussels, the Irish Government divided the country into two regions, the Border, Midland and West region (BMW) and the Southern and Eastern (S&E) region; the former benefits from maximum aid rates and the latter will phase out over the period 2000-2006. The division of the country into two regions has a significant impact on the rates of state aid that can be offered to potential inward investors, as the Irish government can offer maximum aid rates of up to 40 percent in the BMW region, and a reduced 20 percent in the S&E region.
(B) Privatization(B)
There is no formal government privatization plan. The Minister for Public Enterprise oversees the government's stated goal of doing "whatever is necessary to enable [state companies] to be competitive and cost-effective," including finding strategic alliance partners to expand markets, changing the pension and share-holding structures for employees, and moving to liberalize certain industries. As a general election must be held in Ireland no later than June 2001 it is likely that privatization plans will be put on hold in the lead up to the election.
EU integration and the challenges of a global economy are the engines propelling Ireland to liberalize its remaining state-owned industries. Public and business leaders in Ireland generally support privatization of government-owned industries. Organized labor generally recognizes the need for privatization and more market control in the communications, transportation, and energy sectors, as long as the government still retains a regulatory role.
Against this backdrop, the Irish government is moving ahead with significant privatization plans, particularly in the communications, energy and transport sectors. The state-owned telephone company, Telecom Eireann, was publicly floated on the Dublin and New York Stock Exchanges in May 1999, under its new name "Eircom." Under the agreed plan, employees received a 14.9 percent stake in the company and over 488,000 Irish investors purchased shares in Eircom. Also as part of the privatization, Eircom sold off the state-owned cable network, "Cablelink," to "NTL," an Anglo-U.S. firm, which is presently launching a raft of telecommunications services ranging from an extension of the cable network to the provision of next generation Internet facilities.
Ireland has opened 33 to 40 percent of its electricity market to European competition in accordance with the EU electricity directive. This development has sparked significant interest among electricity suppliers, both domestic and foreign, in the Irish electricity market, although the provision of electricity in Ireland is relatively costly for suppliers, owing to low demographic density in areas outside the major urban centers. The Irish government is moving to implement EU Directive 98/30/EC, which mandates deregulation of member states' natural gas markets. Under the Directive, 28 percent of the total annual gas consumption of each Member's national gas market must be open to competition by 2003, rising to 33 percent by 2008. The Irish government's "Gas (Amendment) Act 2000" was designed to incorporate the EU Directive into Irish law and create the necessary regulatory environment for a deregulated gas market.
In the transportation sector, the government sold Team Aer Lingus, the maintenance arm of the state-owned airline Aer Lingus, to a private Danish concern in 1998. In June 2000, the Minister for Public Enterprise published the "Aer Lingus Bill 2000," which provides the legislative platform for the initial public offering (IPO) of shares in a privatized Aer Lingus. The proposed flotation of Aer Lingus has taken a step backwards in 2001, as the industrial relations climate has worsened within the company. Profits look certain to fall. The Minister for Public Enterprise recently suggested that the Irish government and Board of Aer Lingus may opt for a "trade sale" rather than flotation. Aer Lingus employs over 6,200 people and operates thirty-eight aircraft serving thirty-four destinations. In 2000, it carried over 6.9 million passengers.
The state-owned Irish transport company, Coras Iompar Eireann (C.I.E.) is split into three subsidiary companies: Iararod Eireann (which provides rail services); Dublin Bus (providing Dublin metropolitan bus service); and Bus Eireann (providing provincial bus service). Recently, the government put forward a plan to permit private bus companies to subcontract with Dublin Bus for service on selected routes in the Greater Dublin Area.
Balance of Payments
2000 was the first year since 1991 that the current account has not been in surplus. In 2000, the current account moved into deficit to the tune of $826.4 million compared with a surplus of $602 million in 1999. The deficit of $826 million recorded in 2000 is approximately 0.5 percent of GDP, down from a 0.4 percent surplus of GDP in 1999. This year-on-year reduction in the Balance of Payments surplus does not suggest the level of Irish exports is decreasing, but that the level of imports is increasing due to increased demand for luxury items and services. In fact, Irish export volume growth has outperformed average EU growth consistently in recent years. The merchandise trade surplus in 2000 reached a record $26.5 billion, or 27.1 percent of GDP. Merchandise exports totaled $76 billion in 2000, an increase of 26.6 percent over the previous year, with services exports rising over 19 percent, primarily due to increases from the high technology sector. The Central Bank of Ireland forecasts a significant slowdown in export growth in 2001. The slowdown in the US and slower than predicted growth in the euro area is expected to take its toll on Irish exports. The high-technology sector in the U.S. economy has been at the center of the slowdown in activity and the effects are already evident in Ireland with some flagship inward investment projects being postponed. There has been some impact on employment, although limited to date. Two factors may cushion the impact of the U.S. slowdown on Ireland. First, many of the U.S. multinationals based in Ireland produce goods and services for European markets and therefore are not overly dependent on the fortunes of the domestic US economy. Second, the ongoing weakness of the euro bolsters Irish competitiveness in the short run and makes exports to non-euro countries relatively cheap. The Central Bank of Ireland forecasts that when external demand and exchange rates are factored into the equation for merchandise export, growth will fall significantly to about 10.25 percent in 2001. This represents a significant deceleration but would still be a significant growth given the deterioration in the external environment. Imports of goods and services grew strongly in 2000, increasing by 28 percent. The value of merchandise imports rose 29 percent to $49.5 billion. The value of imports is projected to increase by 12.6 percent in 2001, faring better than export growth due to the continuing relative strength of domestic demand.
Much of the merchandise trade surplus is offset by the $13.85 billion deficit in the factor income balance, which includes all direct investment income of multinational firms, whether remitted overseas or retained in Ireland. This amount is expected to rise to $15 billion in 2001. A current account deficit amounting to approximately 1 percent of GDP is expected in 2001, with the merchandise trade surplus projected to approach $26.7 billion. The fact that Ireland has moved from a current account surplus to a deficit over the course of the past two years is largely due to a continuous increase in domestic demand, and a demand for financial services to complement developments in the Irish Financial Services Center (IFSC). Although Irish exports are expected to continue to grow into the near future, imports will grow at a faster rate, especially in the services sector, thus creating a marginal current account deficit for some time.
Direct investment into Ireland again showed strong growth in 2000, with investment flows of $19.8 billion representing an increase of more than 25 percent compared to 1999. Equity capital and reinvested earnings each contributed more than $9 billion, while there was an increase of around $1.85 billion in other capital liabilities. Direct investment in IFSC enterprises amounted to $13 billion in 2000. Some $8 billion was invested outside the IFSC last year, up from $6 billion in 1999. This was largely due to the continuing strong performance of the foreign-owned multinational sector. In contrast, outward direct investment of $2.7 billion by Irish residents in 2000, showed a sharp fall from the corresponding figure of $4.8 billion in 1999.
Infrastructure
Ireland has close transport connections to international markets. No part of the country is more than 70 miles from a harbor or airport, from which frequent shipping and air services connect with the UK, continental Europe, and other international destinations. An extensive road and rail network provides internal transportation, supplemented by domestic air services between Dublin and Ireland's three other international airports (Shannon, Cork, and Knock) and six regional airports.
Ireland has 55,500 miles of paved roads, of which 3,350 are classified as main roads. While the country has more paved roads on a per capita basis than any other country in the EU, it lacks an efficient network of highways, especially multi-lane highways to the major ports. Road transportation is the preferred means of travel and goods distribution, with 96 percent of all inland passenger transport and over 90 percent of inland freight transport conveyed by road. The balance is carried by rail. The 1,700-mile rail system provides passenger and freight services to most cities and main towns, including those in Northern Ireland. It primarily links Dublin with the other major urban centers. The national network of buses is far more extensive than the rail system.
Dublin, Cork, and Limerick are the three largest ports, with Dublin the principal port. There are numerous smaller harbors around the coastline. Ferry and freight services connect Ireland to the UK and continental Europe.
Ireland is forging ahead in efforts to establish the country as the e-commerce hub or capital of Europe. The focal point of the government's endeavor is to expand high speed Internet connectivity, while sharply lowering costs. This is also an EU-wide priority. Ireland is connected to the main U.S. Internet backbone and with a 36-city European network via Global Crossing's undersea Atlantic cable. Officials predict that Ireland will be the first European country where every home and office will have high speed, broadband access to the Internet. Use of the web is currently estimated at about 39 percent of the adult population, still behind that of most European Union countries.
Major Infrastructure Projects Underway
The Irish Government's National Development Plan 2000-2006 (NDP) outlines spending plans of about $45 billion aimed at eliminating barriers to sustained growth in its fast growing "Celtic Tiger" economy. Over the next five years, the NDP will provide excellent business opportunities for American companies willing to take a long-term view to the market. There has been concern expressed that the rollout of the NDP has been slow with some commentators arguing that bottlenecks in the planning process will continue to delay project start-ups until measures are implemented to alleviate the impediments.
In a major change of direction, the Government of Ireland (GOI) has signaled that it will seek to attract the participation of non-Irish, including U.S., firms to roll-out the NDP. This change in government policy is an acknowledgment that Irish construction and engineering firms will not be able to meet the objectives of the 2000-2006 NDP. According to Prime Minister Ahern in 2000, "Within two years an awful lot of EU contracts are going to go to foreign companies. The people here do not have the capacity to take them on. We are determined to get on with this and the huge contracts are going to go abroad." This new policy is expected to open the market for non-Irish competitors, as tenders will focus on larger contracts and Public Private Partnership (PPP) projects.
As a result of the strong growth of the Irish economy over the past six years, the Irish national treasury will finance most of the "National Development Plan 2000-2006 (NDP)." The European Union (EU) is expected to contribute about $6.0 billion (less than one-eighth of the total), as compared to funding most of the two previous national development plans (1989-1994 and 1994-1999). The NDP also outlines the use of public private partnerships (PPPs) to fund major infrastructure projects for the first time. The plan encompasses projects throughout the country with EU funds being spent principally in the BMW region.
To the best of our knowledge, the information contained in this report is accurate as of the date published. However, the Department of Commerce does not take responsibility for actions readers may take based on the information contained herein. Readers should always conduct their own due diligence before entering into business ventures or other commercial arrangements. The Department of Commerce can assist companies in these endeavors.
