Ex­pand­ing with­out over­heat­ing is the chal­lenge fac­ing the na­tion

Sunday Independent (Ireland) - Business & Appointments - - FRONT PAGE -

THOSE of a cer­tain vin­tage will re­call a nurs­ery rhyme that opens with the line ‘Mary, Mary, quite con­trary, how does your gar­den grow?’. These days there is a sing-along ver­sion do­ing the rounds which re­places the sil­ver bells, cockle shells and pretty maids of old with a pro­fu­sion of colour­ful flow­ers. All are still in a per­fect row but now in­gre­di­ents like seeds, wa­ter and space get a men­tion.

How is this rel­e­vant? Well, if we sub­sti­tute the gar­den with the econ­omy and re-la­bel the in­puts labour, cap­i­tal and pro­duc­tiv­ity, we have the essence of how coun­tries grow.

Growth in Ire­land has been strong for some time and a range of met­rics like the low un­em­ploy­ment rate sug­gest that the econ­omy is rapidly us­ing up its avail­able re­sources.

Typ­i­cally it is at this point that price and wage pres­sures start to build and over­heat­ing risks emerge.

As talk of the econ­omy reach­ing full ca­pac­ity has in­creased, so too have the dan­ger warn­ings, with the Cen­tral Bank and the Fis­cal Ad­vi­sory Coun­cil among the com­men­ta­tors stress­ing the im­por­tance of pru­dent eco­nomic and bud­getary man­age­ment. The idea be­hind this is to stop things get­ting out of hand by keep­ing a lid on de­mand. Roses get pruned for much the same rea­son.

Of course, prun­ing also en­cour­ages fresh growth and, in­deed, bol­ster­ing the econ­omy’s abil­ity to pro­duce more goods and ser­vices is some­thing that we need to start giv­ing more thought to. This will in­volve mea­sures to boost the labour force and the cap­i­tal stock.

In the case of the for­mer, pop­u­la­tion in­creases in­clud­ing in­ward mi­gra­tion will have a role to play but there is also scope to raise the par­tic­i­pa­tion rate among some groups.

In the case of the lat­ter, up­ping busi­ness in­vest­ment will be key. Re­cent Bank of Ire­land Eco­nomic Pulse re­search looked at firms’ plans for re­plac­ing plant and equip­ment, pur­chas­ing new premises and in­vest­ment in ICT among other things and sheds light on the fac­tors in­flu­enc­ing in­vest­ment de­ci­sions. De­mand from cus­tomers, at home where busi­nesses are serv­ing the do­mes­tic mar­ket and over­seas where they are ex­port­ing, is gen­er­ally seen as sup­port­ive. The same goes for fi­nan­cial con­di­tions and tech­ni­cal fac­tors get a broadly pos­i­tive re­sponse as well.

Uncer­tainty is a drag, how­ever. Un­sur­pris­ingly, the weed with the strong­est choke­hold in this re­spect is Brexit. This is re­flected in the fact that half of Irish busi­nesses im­pacted by the UK’S de­ci­sion to leave the EU in­di­cated that they had put their in­vest­ment plans for next year on hold.

The si­t­u­a­tion re­mains fluid, with a draft deal on the ta­ble and Prime Min­is­ter May sur­viv­ing last week’s lead­er­ship vote, but get­ting the agree­ment of the UK par­lia­ment will be dif­fi­cult if not nigh on im­pos­si­ble. This means that some firms are go­ing to be liv­ing with Brexit uncer­tainty for an­other while yet.

In sus­tain­ably grow­ing the econ­omy, there is one fur­ther con­sid­er­a­tion — the some­what neb­u­lous con­cept of pro­duc­tiv­ity. The think­ing here is that while it is all well and good to have more work­ers and more cap­i­tal, im­prov­ing the over­all ef­fi­ciency with which these re­sources are used will also be im­por­tant.

Pub­lic in­vest­ment can con­trib­ute to this by en­hanc­ing the pro­duc­tiv­ity of labour and cap­i­tal.

In­vest­ment in in­fra­struc­ture, for ex­am­ple, cre­ates an en­abling en­vi­ron­ment, low­er­ing firms’ costs and in­creas­ing com­pet­i­tive­ness. But with firms in many part of the coun­try scor­ing the ex­ist­ing trans­port and telecom­mu­ni­ca­tions net­work poorly ac­cord­ing to Pulse re­search, there is clearly a way to go on this front.

While the new Na­tional De­vel­op­ment Plan sets out var­i­ous ini­tia­tives to ad­dress these gaps and is a start, it is likely to face some chal­lenges in do­ing so, not least a short­age of con­struc­tion work­ers.

Let me close by re­fer­ring again to the open­ing anal­ogy. Mary un­doubt­edly put a lot of hard work and lov­ing care into tend­ing to her gar­den. In re­la­tion to the econ­omy, we ba­si­cally need to do the same, boost­ing its pro­duc­tive ca­pac­ity while also keep­ing over­heat­ing risks at bay.

This may prove to be a dif­fi­cult bal­anc­ing act but the prize of sus­tain­able growth is surely worth it. Dr Loretta O’sul­li­van is group chief econ­o­mist with Bank of Ire­land Group

The on­go­ing uncer­tainty of Brexit is a ma­jor is­sue for Leo Varad­kar’s Govern­ment and the Irish busi­ness com­mu­nity

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