Foreign capital flows into Ireland are decreasing and the construction inustry shows signs of weakening THIS Wednesday the Central Statistics Office (CSO) published three sets of new statistics on Ireland's economic performance. Virtually all figures show new pressures building up in the Irish economy.

The first set contained the latest data on economic growth for Q4 2006 and the full year 2006.

According to the CSO, in 2006 Gross Domestic Product (GDP) grew by 6.0%, while the Gross National Product (GNP) increased by a whopping 7.4%.

If this sounds like great news, there are plenty reasons for serious concerns. First, the largest source of gains in GNP . . . the measure of national income that excludes profits of foreign owned companies . . . was personal consumption of good and services . . . up 9.0% in 2006. The second largest source was government consumption expenditure . . . up by 9.5%. Taking into account the share of government spending on goods and services, plus state spending on capital projects, Ireland's public expenditure grew by approximately 9.7% . . . the largest rate of growth amongst all broadly defined components of GNP.

Second, at 7% our exports growth was much slower than the growth in imports . . . up 8.8%. This suggests that our exporting sectors, although still in rude health, are facing increasingly tougher competition in the global markets, while our appetite for foreignmade goods is growing faster than our ability to pay for them. This conclusion is reinforced by the second set of data released this week. According to the CSO, Ireland's current account deficit increased by an alarming 173% in Q4 2006 relative to Q4 2005. Annually, our current account deficit grew by 37.8% in 2006 relative to 2005.

Third, a worrisome picture emerges when one considers CSO figures on growth rates in the gross value added in the main sectors of economy. In 2006, the agriculture, forestry and fishing sector recorded a net loss of some 4.04% in gross value added, our industrial sector achieved a 4.44% gain, distribution, transport and communications services experienced growth of 6.65%, public administration and defence increased their value added by only 1.81%, while other services gained 4.98%. This reinforces the trend since the late 1990s whereby private sectors, especially those operating in the highly competitive environments, continue to outperform public sector in terms of value added growth.

The fourth problem with the Irish economy's health was highlighted in the country's financial account, which recorded a significant outflow of direct investment from Ireland. In 2006, Ireland recorded a 7.4bn net loss in direct investment. In addition, we also lost 15.6bn of portfolio investment. Although Ireland did record an overall surplus in the amount of 7.75bn in our financial account, this surplus was almost entirely due to 20bn surplus in "other investment" category which includes loans, currency and deposits, financial derivatives and trade credits. In other words, our surplus in financial accounts is largely driven by the loans made abroad, while in the area of real investment we are facing a significant deficit.

Our policy analysts from the likes of Forfas and ESRI would want us to believe that the outflows of capital from the country are due to a one-time tax break granted by the US to its multinational corporations. Alas, this is simply not so. Instead, we experienced losses in investment in both the new foreign direct investment and in domestic re-investment.

Furthermore, the majority of these losses are in our financial account vis-a-vis the other EU 25 states.

Finally, the CSO also released a set of data on the new planning permissions for Q4 2006. The main findings that most of the press has focused on relate to the continued decline in planning applications for new construction. In Q4 2006, relative to Q4 2005, the number of new dwelling units approved in Ireland has fallen by 23.4%. This decline was led by a 30.4% contraction in the number of new apartments and 21.4% contraction in new houses. These figures are ominous in so far as they suggest significant slowdown in our construction industry for the year ahead.

However, there is more bad news than that. During the last few years, our planners and builders alike have argued that the new apartments and houses being built in cities across Ireland are of far better quality and more suitable for occupation by families than ever before. According to the CSO data, this is not exactly the case. In 2002, the average new apartment had 77.9sq m in floor area per unit nationwide. This figure increased to just 81.1sq m in 2006 across the country and to 84.1sq m in the Greater Dublin Area. For multi-development houses, the respective figures were also hardly palatial . . . 120.1sq m in 2002 and 128sq m in 2006. Over the same period, the average area of one-off houses has gone up from 192.3sq m in 2002, to 224.3sq m in 2006. In other words, over the years, there has been precious little change in the way we approach construction of apartments and homes.

Another long-running trend reinforced by the latest figures is the static number of new permissions issued for alterations and conversions of existing dwellings.

In 1998, some 2,748 new permissions for alterations were issued in Ireland. By the end of 2006 this number actually fell to 2,678.

In short, the latest data suggests that Irish economy is in a dubious health. Our domestic growth is running high on the back of inflationary increases in government spending. Our personal consumption boom is being primarily absorbed by imports, while our exports are failing to keep pace with our purchases from abroad. In addition, our long-term successes in attracting foreign direct investment and other financial capital inflows into Ireland have been all but eroded. The last thing this economy needs at this stage is a slowdown in a major sector of economic activity. Alas, Ireland's leading growth sector . . .
construction . . . is showing the real signs of weakening.

GALILEO UPDATE

TWO weeks ago, this column reported on the lack of our policymakers' interest in bidding for one of the most promising R&D and science and technology projects the EU has to offer . . . the Galileo Project. Since then, two new developments highlight the need for a more visionary approach to Irish participation in EU programmes in the future.

First, the Minister for Transport, Martin Cullen has issued an offical reply to the PQ tabled in the Dail by Eamon Ryan TD. The PQ was based on Sunday Tribune and Business & Finance magazine inquiries into the Galileo Project. Here is the full record.

Dail Question No: 177: "To ask the Minister for Transport the reason for his decision not to apply to the DirectorGeneral (DG) for Energy and Transport for the location of the technical agency of the Galileo project in Ireland, following the DG's correspondence with his Department in 2006." Eamon Ryan, TD.

On March 22, 2007, Minister for Transport issued the following reply: ". The [Galileo] project is being managed by the Galileo Supervisory Authority (GSA), which was established on 1 January 2007. . . Eleven Member States have made bids to secure the location of the GSA, and no agreement has been reached to date. It is understood that the German Presidency will be seeking to make progress in relation to this issue. Ireland's decision not to make a bid was influenced by the December 2003 European Council conclusion to give priority to newer Member States in the distribution of the seats of the agencies to be set up in the future."

The Minister for Transport states that his decision was "influenced by the December 2003 European Council conclusion to give priority to newer Member States".

However, the 'conclusion' was simply a recommendation made by Presidency to the Council that newer Member States should be given increased consideration.

This in no way means that one of the EU-10 will ultimately be the host of the agency. In fact France, Germany, the UK and several other 'older' Member States are bidding on the Project. It should also be pointed out that the Directorate General directly contacted the Minister seeking an application for the agency to be located in Ireland.

While the Department of Transport was busy declining Ireland's bid for Galileo, an enterprising Irish company, Mediasatellite, was able to land a prestigious contract to provide engineering support services to Galileo.

Mediasatellite will deliver engineering support to two Ground Control Centres and eighteen Sensor Stations around the globe under the current 1.5bn development phase of the project. Clearly, the folks at Mediasatelite were not aware of the Department of Transport reservations about the project.

Dr Constantin Gurdgiev is an economist and editor of Business & Financemagazine