The Irish economy is continuing to produce the high rates of growth it has achieved since 1995 but t...
The Irish economy is continuing to produce the high rates of growth it has achieved since 1995 but there are concerns about the prospects of a rise in inflation and labour shortages.
Paul Cosson, investment manager on the pan European team at Martin Currie says: "The Celtic tiger is still roaring but there are a few things nipping at its heels. Growth is powering ahead but inflation is picking up, it is now at 6%, the highest in Europe. There are also concerns that return on equity, which has been very high, will decrease."
He says one of the problems for the Irish government is that it no longer has control over interest rates. On entry to the euro interest rates were 2.5%, they have now increased to 4.75%. This is a significant increase but not enough to dampen down the economy.
"The only thing the government has at its disposal to cool the economy down is fiscal policy," Cosson adds. "However the government has a national wage agreement with the unions, which is re-negotiated every three years. Three years ago wage cuts were foregone in return for tax cuts. Loose fiscal policy and loose monetary policy lead to strong GDP growth, which has given rise to inflation at its current rate."
Cosson says that with the problem of labour shortages across Ireland, inflation is in danger of being built into the economy. He notes there have been threats of strikes by taxi drivers among others.
Katrina Jack, investment manager at Baillie Gifford, believes the Irish economy is approaching a gradual slowdown rather than a serious hard landing.
"Ireland is heavily dependent on investment inflows from multi-nationals, most of which are in the US," she says. "Its success in attracting foreign investment over the past 10 years due to low taxation has been one of the most attractive things about it. The only thing that could really damage it is if there is a severe collapse in the US but I am still of the opinion that the US will achieve a soft landing."
According to Jack, technology is an important part of the Irish market. Ireland produces 60% of all packaged software sold in Europe and 30% of all computers sold in Europe. It has attracted 40% of all inward investment in European electronics since 1980, she says.
Cosson says as Martin Currie invests on a sectoral basis, Irish stocks have to compare favourably with the rest of Europe to be included.
Martin Currie holds only one stock, pharmaceutical company Elan, which Cosson says is attractively valued for the growth provided in earnings compared to the rest of the European pharmaceuticals sector.
Baillie Gifford is relatively overweight Ireland. Jack says it is difficult not to be overweight considering Ireland is a small country and therefore a small part of the European index. Baillie Gifford has holdings in Elan and Iona, a middleware company. It also has holdings in CRH, a building materials company.
What appears most probable, says Jack, is that the European stock market winners of 2001 will not be the same companies that dominated for most of 1999 and 2000.
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