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Record current account surplus shows space for wage increases

Posted on March 13, 2014 by Rory O'Farrell

The latest GDP figures are disappointing (showing a contraction in 2013 of 0.3% due to both the 'patent cliff' and a stagnant domestic economy). However the current account surplus has reached a record high of 6.6% of GDP. For comparison, in 2012 Germany had a surplus of 7% and the Netherlands had the highest surplus of 7.7%.

The current account surplus is the trade surplus (exports less imports) less 'current' payments abroad, such as interest payments and the repatriated profits of firms. Similar to personal current account, a surplus shows that the nation as a whole is saving, while a deficit shows the nation as a whole is borrowing. A negative current account deficit is not necessarily a bad thing. Since the 1960s Ireland has usually had a deficit (only during the period 1992-1999 has Ireland sustained a surplus, with a surplus of 3.7% in 1993). This is normal for countries in a catch-up phase that import machinery and other productive assets. In 2007 however the current account deficit measured -5.6%.  The recent figure may be a little exagerated due to foreign firms deciding to reclassify themselves as Irish firms (see here for details), but even given this, the current account is firmly in surplus.

The current account is the ultimate measure of a nations economic competitiveness. Ireland has re-entered a phase of 'super-competitiveness' allowing scope for wage increases. There is scope to increase personal consumption, boosting the domestic economy, while still maintaining a healthy balance with our trading partners.

A Research InBrief and a Working Paper on the topic of Ireland's international competitiveness are available for download.

Posted in: MacroeconomicsWages

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