NCC warning on competitiveness challenges

Wednesday 02 April 2014 07.51

 

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The NCC says Ireland is still a high-cost place to do business

At least the National Competitiveness Council hasn’t been taken in by the hype over property prices.

It clearly sees the dangers of rapidly rising house prices and rental costs – at least from a cost competitiveness point of view.  It notes a recent Fitch report on Irish housing costs, which said that house price affordability in Ireland compared favourably with a range of benchmarked European Economies, and is broadly similar to the affordability ratio in the UK.

But it also notes the significant shift in house price trends here, with a return to house price growth  -  up 3.7% on an annual basis in the third quarter.  Meanwhile house prices in the Euro area as a whole fell 1.3% in the same period. It warns that “this will have an adverse impact on affordability, and could have a knock on impact on wage costs”.

The picture for housing rentals is even worse.  Nationally rents went up 3.8% in the third quarter compared with Q3 2012, but in Dublin they went up 7.6%.  The NCC states that “this also has a significant impact on the cost of living with subsequent impacts on wage expectations and cost competitiveness”.

This might not be so bad if we were starting from a good place when it comes to costs.  But we are not.  In its report “Costs of Doing Business 2014”, the NCC characterises Ireland’s price level as “high cost”, and its inflation profile as “rising slowly”.  And even the latter isn’t good news because of the lowflation/deflation negative impact on the debt burden.

Interestingly the NCC report shows that despite the collapse of the construction industry here, the cost of building industrial and prime office space is higher here than some other “high cost” competitors.  For example, while industrial space at €1,000 per square metre is cheaper than the €1,800 in the US, its dearer than the Netherlands (€820) and the UK (€600).

Office construction costs at €2,000 per square metre are in line with Spain and Finland, and lower than Germany and the UK (about €2,300 each).  But the Netherlands (a strong competitor for “tax efficient” business) can stamp out offices at €1,400 a metre.

Despite the fall in construction costs here, they are still not low enough to tempt many developers (or bankers) to start pouring concrete.  This is contributing to an emerging shortage of top quality office space in the capital, which will drive rental prices up, putting more upward pressure on the general cost base of business.

Remarkably, the NCC also reports that the cost of construction materials and aggregates has risen, despite the collapse of demand for the same.  Part of this it attributed to rising world prices of things like steel and oil based products like tarmac and PVC.  But what about locally produced materials, such as concrete and aggregates?

And for a country that lives or dies on exports, there is still some way to travel to the frontier when it comes to cost and time spent on administrative procedures for shipping a 20 foot container.  While the time taken to comply with administration at eight days is lower than the Euro area average (11 days),  the cost of complying with those procedures is higher, at €1,160 compared with the average cost of €1,044.

But again it’s the comparison with a more relevant peer group that’s more telling – while cost and time is about the same as the UK, Denmark, Holland, Singapore and the US are all cheaper and quicker for exporters complying with administrative procedures.

It’s a similar story with import costs, fractionally dearer and dead on average for cost and time of compliance, but Holland, Denmark, Germany Sweden Finland and Singapore are all quicker and cheaper.  And given the states involved, the government can’t blame EU regulations for the costs.

The cost of electricity for SMEs here is the fifth highest of 15 Euro area states surveyed.  Only Cyprus, Malta, Italy and Germany were more expensive. Gas prices were much better – tenth highest of the fifteen. But there is no room for smugness -  the NCC points out that US gas prices are just one third of those paid by EU firms. That’s $12.74 per MWh in the US versus $45.58 per MWh in Ireland, according to the IEA. Competitive advantage indeed.  It is why the German chemicals industry is investing heavily in the low cost USA (wages are cheaper too in depressed southern states).

The report bluntly concludes “Measures to control energy costs and enhance energy efficiency are particularly important”.

One area where we do win out is in mobile phone costs, where Ireland is tenth highest of the 15 Euro area states surveyed, coming in a decent 24% below the Euro area average.  This is good news as 69% of all voice calls are now made on mobile phones here, while three quarters of voice and data subscriptions are to mobile services.  The only caveat the NCC has is about the quality of broadband services here, which may not be best in class for things like speed and reliability.

Overall the NCC fears that much of the price drops and competitiveness gains seen in Ireland over the past six or seven years may be largely a cyclical response to the international recession, rather than a response to structural – ie permanent – changes in the Irish economy.

It says further structural or policy induced changes are needed to ensure that prices do not escalate and erode competitiveness as the economy returns to stronger rates of growth, and it promises to outline detailed recommendations for addressing major cost factors in a report due later in the year called Competitiveness Challenges.  Can’t wait.

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