Falling rent and labour costs offer trade boost
Competitiveness to rise 15pc compared with rest of eurozone
IRELAND is set to gain over 15pc in cost competitiveness against the rest of the eurozone in the period 2009-12 but a strong euro has offset these gains on its other main trading partners, a new report says.
Domestic costs in the Irish economy have been reducing at an impressive pace, the report by Goodbody Stockbrokers' economists Dermot O'Leary and Juliet Tennant says. The broadest measure of this internal devaluation is unit labour costs and these have fallen.
The cost of labour for each unit of production labour costs fell by 9pc relative to the rest of the eurozone in the past two years and are expected to decline by a further 4pc in 2011-12.
The value of offices has fallen by 59pc, while rents have dropped by 42pc, with similar declines for retail and industrial units.
"From being among the most expensive location in 2006, Ireland is now placed mid-table in rankings of office and industrial property costs," Mr O'Leary, chief economist at Goodbody's, said.
But the currency has moved against Ireland in its two biggest markets, Britain and the US.
"Our newly constructed trade-weighted index shows that, overall, currency movements have been no help in the achievement of an export-led growth strategy since the crisis began," he said.
"By contrast, in Sweden and Finland in the 1990s, their respective currencies depreciated by about 30pc, triggering a significant export-led recovery in both economies. With the currency constraint, there is no magic bullet for Ireland to achieve its goal.
"Nevertheless, Ireland has already begun to reap the benefits of falling costs. Exports grew by 10.6pc in the year to the last quarter of 2010, while net exports are contributing strongly to growth," Mr O'Leary said.
He said the recent pressure on Ireland to increase the corporation tax rate had not been helpful to Ireland's attempts to restore growth in the economy.
"Companies need certainty on these issues, and any uncertainty about Ireland's corporation tax rate must be concluded soon. We also believe the external fixation on the 12.5pc tax rate is misplaced, as it does not tell the whole story."
He cited the recent global tax survey from the World Bank and consultants PwC, which showed that although Ireland has the second lowest headline corporation tax rate in the eurozone, when one accounts for special exemptions, the effective corporation tax rate in Ireland is higher than seven other countries in the zone.
"Incidentally, Ireland is two places below France, which has the sixth lowest effective rate."
Most of the pressure for an increase in Ireland's corporation tax has come from French president Nicolas Sarkozy.
The report says the fall in Irish costs has already started to yield tangible benefits, with the number of foreign direct investment projects increasing by 18pc in 2010.
"We have worked hard at pricing ourselves back in to sectors which had all but closed their doors to Ireland because of continuous rising costs.
"Ireland is now well positioned to compete for IT services and may even see a return to manufacturing, with a potential resurgence in activities such as medical devices and engineering products," Mr O'Leary said.