Irish GDP fell by 1% in 2010.  This decrease in GDP is worse than was forecast by the Department of Finance for the most recent budget and worse than the ESRI predicted in their Winter Quarterly Economic Commentary.  This has negative implications for Irish debt to GDP ratio and is a continuing sign of the still struggling Irish economy.

It would appear that the main cause of the decline has been the domestic economy with domestic consumption falling 3.4%, investment falling 29.4% and government expenditure falling 6.2% in 2010.  These figures show the continuing decline in the domestic sectors of the Irish economy.  The fall in GDP would have been much worse had it not been for the success of Irish exports.  Exports have risen 9.4% in 2010 while imports have only risen 7.4%.  Our net exports for 2010 have increased.

From these figures it is clear that Irish export success has been masking the worrying decline in the domestic economy.  However, a substantial component of Irish exports is comprised of the exports of multinational, not indigenous Irish, companies.  These multinational companies are mainly in the areas of software and pharmaceuticals and chemicals.  This makes our export success, the only positive story in our economy, dependent on a relatively small number of sectors which are subject to potential outside shocks.  If, for example, cooperation tax were to be increased would these companies still remain in Ireland?  It is hard to envisage that they would stay.  And if these companies were to leave and exports were to suffer this would have further negative implications for Ireland’s economic recovery. 

In the current economic downturn, we hear a lot of discussion revolving around the issues of whether Ireland is competitive or not, how we can be competitive and why competitiveness is important.  We are told that becoming competitive is the way to return to economic prosperity.  In essence the importance of being competitive lies in the fact that if you are competitive you can attract large multi-national companies or stimulate indigenous businesses.  These in turn generate employment and pay taxes.  Benefiting not only the people directly employed by these firms but also society through a higher tax take.

The overwhelming focus of the discussions on competitiveness in Ireland revolve around the cost of labour.  Essentially, that the cost of employee wages is too high.  In the build up to the last budget, a lot of emphasis was placed on the minimum wage.  Some argued that this was too high and must be cut, while others suggested that to cut the people who were on the lowest pay scale was unjust.  Regardless of the arguments, in the end the minimum wage was cut.  But will this really make a big difference for Ireland’s competitiveness?  Are we now more attractive than we were before to large multi-national companies or to budding Irish entrepreneurs who wish to start a business in Ireland?  That depends on whether the only factor which concerns these businesses is wages. 

In reality, to a lot of start up businesses or to multi-national firms, factors other than wages also play an important role in deciding whether or not Ireland is a good place to start a business.  The cost of rent is an important element which determines value for companies.  What difference do slightly lower wages mean if companies can not afford to pay their rent?  Another factor is access to credit.  This is a particular problem in Ireland with numerous reports suggesting that bank’s willingness to lend money is falling.  Finally, what about government stability?  The uncertainty generated by Ireland’s inability to balance its budget raises a lot of concern in would be investors.

Therefore, while the reduction in the minimum wage may result in some increase to our competitiveness and attractiveness, there are still a number of other factors which must be addressed.  The high costs of commercial rents, the inability to access money through business loans and the uncertainty in Ireland are all combining to have a negative impact on our competitiveness, and a slight reduction in the minimum wage is not going to be sufficient to balance this out.