| Ireland's structural advantage - corporates to continue to out-perform |
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By: Dermot O'Brien, Dermot O'Brien
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| Buoyed by a growing population and labour supply, Irish companies can look forward to continued prospects for out-performance, writes Dermot O'Brien, as these factors underpin the positive impulse both to the economy's supply-side capacity for growth, and to the structural expansion of the domestic market for goods and services. |
Demographic change has been the key factor behind the Irish economic boom of the past ten years. Changes in the size and age structure of the population have had – and continue to have - a profoundly positive impact on the economy. This provides a solid basis for optimism about the performance of Irish companies, especially those that derive a substantial proportion of their earnings from the domestic market. The strength of this domestic dynamic has substantially insulated the Irish economy from the vagaries of the global economic cycle. Thus, while the international economy was in recession in the early years of the current decade and while the continental European economy suffered through a prolonged period of slow growth, the Irish economy, and the companies that service it, continued to notch up impressive gains. The strength of the demographic dividend is nowhere more evident than in the Irish banking sector where annual earnings growth in he last ten years has averaged nearly 15.5 per cent, compared with about nine per cent in Germany and the UK, and just under 10 per cent in the US.
The essence of the demographic story is that rapid growth in the population of working age has boosted both the supply of labour and the cohort of prime earners and spenders in the economy.  | | Dermot O'Brien |
Part of the positive demographic shift reflects the maturing of the generation born during Ireland's baby boom in the 1970s and early 1980s. The impact of the baby boom generation, passing from the education system into the workplace, has been amplified by two other, linked developments. Falling fertility, leading to smaller families, has meant that the burden of dependency represented by the proportion of children in the population has been substantially reduced. This has had obvious beneficial effects on the discretionary income of the average family. Associated with these developments, the rate of female participation in the labour force has increased very substantially, adding to the available pool of labour and to the ranks of those with real purchasing power. One manifestation of this is that the two-income household has become the norm in Ireland whereas not much more than ten years ago the typical household had only one earner.
The most visible evidence of the strength of the demographic boost to the economy is in the housing market where the level of new house completions is currently running at close to five times what it was in the early-1990s. For the most part, this surge in house construction has reflected the housing needs of a growing adult population, as the baby boomers have moved out of home and set up their own households. More recently, rising net immigration has been an additional source of demand for residential accommodation. An elevated scale of activity is also evident in non-residential construction where the aggregate floor area of developments for which planning permission is being granted is currently running at three to four times what it was ten to fifteen years ago. While the magnitude of the increase in construction activity is unprecedented, it is consistent with an economy whose size has doubled in the last ten years. Total employment in Ireland currently stands more than 50 per cent above its level in 1995. It should not be a surprise, therefore, that a considerable programme of commercial development has been needed to accommodate the businesses that have generated such an increase in the workforce. Moreover, the pressure of population growth exposed the inadequacy in Ireland's transport infrastructure and public capital spending aimed at remedying the deficiency has been an additional source of support to construction activity. Frequent comment on the extent to which growth in Ireland is 'dependent' on construction activity gives a false impression of vulnerability, as if the boom in construction in Ireland were artificially generated. The true position is that strong growth in building activity is simply one of the natural consequences of Ireland's demographically driven expansion.
A relatively fast rate of credit growth is also a corollary of the high rate of construction activity generated by changing demographics. Not surprisingly, the surge in demand for housing, as Ireland's baby boom generation seeks to satisfy its accommodation needs, has been accompanied by strong rates of increase in mortgage credit and the build up of a relatively high level of household debt. The fact that debt per household in Ireland is in the upper reaches of the EU league, however, is not necessarily a cause for concern. In part, it reflects the stronger preference for home ownership in Ireland than in the EU generally. So, a greater share of debt is shouldered by households rather than, for example, real estate companies providing accommodation for rent. It also reflects the fact that around 30 per cent of Ireland's housing stock has been built in the past ten years, so the debt is of recent vintage. Elsewhere in the EU, the post-war baby boom generations are a good deal older and their housing needs were met, and the associated surge in debt incurred, twenty or more years ago. Moreover, strong rates of growth in non-residential construction, both commercial and infrastructural, have driven demand for credit by construction and real estate companies.
The scale and composition of employment growth in the last ten years are testimony both to the strength and to the domestically based nature of the economic boom. Around 700,000 net new jobs have been created since 1995, representing an average annual growth rate of over 4.5 per cent.
Multinational manufacturers employ less than 100,000 people and most of their material inputs are imported. As a result, they have only a tenuous connection with the rest of the economy. This has meant that the vast majority of the two million strong Irish workforce was not exposed to the periods of recession and slow growth experienced by many of Ireland's trading partners in recent years. The combination of this insulation and the powerful structural force derived from Ireland's changing demographics has, thus, provided an environment for domestically-focussed companies that could hardly have been bettered.
The demographic forces that have boosted the Irish economy in the past ten years are far from spent. Growth in the indigenous population of working age remains rapid and is now being enhanced by a relatively high rate of immigration. Migrants from the ten new EU countries, who have free access to the Irish labour market, have become especially important in this respect. The attractions for such migrants of an economy where employment is growing rapidly are not hard to fathom when compared with the scarcity of opportunities in other, slower growing EU countries. Moreover, such attractions are not likely to lessen in the years ahead as the population of working age in other EU countries begins to decline, reducing the capacity of other member state economies to grow.
Even on conservative migration assumptions, we believe the population of working age in Ireland can grow at a sustained 1.5 per cent to 2 per cent annually in the next ten years, and the labour supply can grow at a faster pace given the ongoing rise in female labour force participation. This development will underpin the positive impulse both to the economy's supply-side capacity for growth and to the structural expansion of the domestic market for goods and services. Irish companies can, therefore, look forward to continued prospects for out-performance. |
Dermot O’Brien is chief economist at NCB Stockbrokers.
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