Quarterly Economic Observer - Autumn 2018 - "Productivity on the Island of Ireland: A Tale of Three Economies"

This edition of the NERI’s Quarterly Economic Observer (QEO) outlines our latest expectations for the economic outlook in the Republic of Ireland and Northern Ireland (Section 1) and examines labour productivity on the island of Ireland (Section 2).

Economic Outlook for the Republic of Ireland

• The economy of the Republic of Ireland is growing strongly and the short-term outlook remains generally positive. We project real GDP growth of 8.1 per cent in 2018 and 3.9 per cent in 2019.
• The labour market should also continue to improve with substantial employment growth forecast in the short term, albeit at a slower pace than in recent years. The unemployment rate should fall to close to 5 per cent by the end of 2019.
• Labour market improvements should tighten the labour market and lead to faster real wage growth. We project nominal average hourly earnings growth of 2.9 per cent in 2018 and 3.4 per cent in 2019.

Macroeconomic performance & projection, Republic of Ireland

Economic outlook for Northern Ireland

• Continued uncertainty around the terms of the UK’s exit from the EU and the political direction of Northern Ireland in the absence of a devolved government contribute to ongoing weakness in the region’s economic outlook.
• Despite these tailwinds, some improvement has occurred in overall output, and the Manufacturing sector in particular has seen some recovery. Concerns remain about productivity growth in the sector however, which is still substantially below 2016 and 2017 levels.
• Though labour market conditions appear to have tightened, there is very little evidence that real wages have grown as a result. This points to sustained issues with employment quality in Northern Ireland.

Productivity on the Island of Ireland – A tale of three economies

• The divide in productivity between foreign and domestic controlled enterprises, we argue, conceals a great deal of weakness in the economy of ROI, leading to three relatively distinct economies on the island; a foreign dominated ROI economy; a domestic ROI economy; and the NI economy.
• A significant gap in labour productivity is apparent between NI and ROI from the turn of the century. While ROI improves relative the EU15, NI maintains a consistent gap.
• The latest complete regional data set indicate that there is a large variation in the performance of sub regions in both economies. Dublin predominates and Belfast is the only NI sub-region to make the top half of the 13 on the island and is the only NI sub-region above the ROI average.
• Whereas the domestic sector produced about three quarters of Gross Value Added (GVA) in NI and the EU 15, the foreign controlled sector generated a majority (53.1 per cent) of GVA in ROI. This points to a divide in labour productivity hidden in aggregate statistics.
• On average, foreign-controlled firms in ROI are consistently much more productive than their counterparts in the EU15, though this is likely tied to tax planning activity bias in statistics. The domestic controlled sector, on the other hand, was slightly underperforming the domestic controlled EU15 average up to 2014, after which measured labour productivity begins to exceed EU15 averages.
• Comparing the structure of the domestic economy of ROI with that of the NI and the EU15 domestic economy, we observe similarities and differences. Gaps in the domestic sector in ROI appear where the foreign sector dominates particularly in
• Examining productivity by sector, we see that ROI performs well in comparative terms domestically in Manufacturing, Transportation and Storage, Professional, Scientific and technical activities and Administrative and support service activities in 2012 and 2014. The domestic economy sees relative underperformance compared to the EU15 in Information and Communication and Real Estate Activities in both years. Shifts within the Administrative and support service activities sector biases aggregate improvement however.
• The foreign controlled sector of the ROI economy is substantially more productive than the domestic economy in general. While this is not unusual, this differential is relatively pronounced in the ROI case. However, this performance varies by sector. Labour productivity in the Accommodation and food service activities, Real estate activities and Professional, scientific and technical activities sectors is below EU15 averages. Aggregate performance appears to be driven by two principal sectors: Manufacturing and Information and communication.
• The NI economy comes behind both sectors of the ROI economy in all but 1 industry, Wholesale and Retail. The foreign sector in ROI clearly drives high measured productivity levels. There appears to have been some positive spill over into the domestic economy in ROI, though this has not been as large as could be expected particularly so in Information and Communication and less so in Manufacturing. For Northern Ireland, having a higher level of FDI than the EU15 has not resulted in a higher level of productivity overall.

In policy terms, the success of FDI should be measured by spill over effects rather than simply scale. FDI success is tied to a number of factors including local firm integration and human capital. This appears to be particularly true in NI. While there is some evidence of spill over in ROI, data indicate that the effects are limited and productivity issues remain in the domestic sector. Policy in both jurisdictions should emphasise higher productivity sectors that can support long-term growth and higher wages.