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Economic Forecast – Ireland grows while global economy slows

Economic Forecast – Ireland grows while global economy slows

In its latest batch of quarterly forecasts, the EU’s executive arm, the European Commission, has predicted growth in the Irish economy of 4.1% this year. It’s not just good news for Ireland, with all EU countries poised to continue growing – the bloc is looking set to post its seventh consecutive year of expansion, economic growth across the entire EU is predicated to be 1.5% according to the forecast, with Ireland significantly outperforming this mark.

The report does sound significant notes of caution. It highlights the risk that Brexit, further uncertainty in global trade and a slowdown in the Chinese economy pose to the EU’s economic outlook.

What’s in the report?

Every year the European Commission’s Directorate-General for Economic and Financial Affairs produces two comprehensive economic forecasts (spring and autumn) along with two interim forecasts (winter and summer). This forecast is based on technical assumptions regarding:

  • Exchange rates
  • Interest rates
  • Commodity prices

The interim forecasts also cover annual and quarterly GDP and inflation for the current and following year for all Member States.

Across the EU – continued growth, but slower

In this winter’s 2019 economic survey, the European commission has pared back forecasts for all the major European economies, including Ireland. So, while we’re seeing expansion in every Member State, the rate of growth is projected to moderate compared to the high growth rates in recent years. Put simply, continued growth, but slower.

Europe’s economic fundamentals remain solid. We continue to see good news across the bloc, particularly on the jobs front. Valdis Dombrovskis, Vice-President for the Euro and Social Dialogue, confirms the point saying: “All EU countries are expected to continue to grow in 2019, which means more jobs and prosperity.” The report believes the rate of growth will rebound gradually in the second half of this year and in 2020.

The slowdown, seen mostly in the euro area, is mainly due to global trade uncertainties and domestic factors in the EU’s larger economies – Germany, Italy and France.

Concerns about the sovereign-bank loop – the connection between a country’s failing banks and a country’s potential inability to meet its financial obligations (i.e. default) ­– have also resurfaced in some euro area countries.

Ireland – a star still rising

While the outlook for Europe is one of cautious optimism the figures for Ireland paint a rosier picture. The economy grew at a strong pace in 2018, underpinned by continued momentum in employment and increased investment in construction.

The country is set to have the second fastest economic growth in the EU this year, according to the forecast. The report predicts strong growth of 4.1% this year, joint second highest with Slovakia. A more dovish, yet still impressive growth rate of 3.7% is expected for 2020 – the fall off due to uncertainty surrounding Brexit and a less favourable global economic environment.

The extent of Ireland’s success with regards to investment is highlighted in the report.

Overall Investment in the euro area weakened significantly in the third quarter of 2018 – from 1.6% in 2018-Q2 to 0.7% 2018-Q3. This was due to numerous factors including a slowdown in both France and Spain, a sharp drop in non-construction investment in Italy and a fall in construction spending in the Netherlands. These figures contrast sharply with the significant pick-up in investment spending in Ireland of 21.8% – a hugely impressive figure.

Building on the up

The forecast sees construction here expanding “at a brisk pace” over the coming two years. The report states that: “Robust employment developments, stronger wage growth and weak inflation are set to further support private consumption.” The increase in cconstruction sentiment can clearly be seen in a strong rise in planning permissions for residential building in the last year. The forecast suggests this momentum in building activity will continue in the coming quarters supported by the government’s supply measures.

More jobs and increased private consumption

The report highlights a strong increase in employment across many sectors, supporting a continued increase in private consumption. Real GDP is estimated to have grown by 6.8% in 2018.

In 2020, headline inflation is expected to pick up to 1.4%, on the back of increasing wage pressures in a tight labour market. This is balanced out by the positive news that household debt fell again in the third quarter of 2018. Now standing at €137.5 billion or €28,316 per capita, it’s at its lowest point since 2005. The Government coffers also received a boost, post-Christmas, with VAT receipts jumping to a record €2.7 billion for January. The latest exchequer returns show sales tax accounted for more than half the €5.4 billion in tax collected.

The scorecard around the EU

The German economy will grow this year by 1.1%. This is down sharply from its previous autumn forecast, as faltering world growth weighs on exports. Both the French and UK economies will grow by 1.3% while the Italian economy, which fell into recession late last year, holds up the table with predicted growth of 0.2%, “sizeably less than anticipated in the autumn forecast”, the EU said. The report also warns that some eurozone countries face their finances again being disrupted by weak banks.

Brexit – a forecast on an outcome unclear

The spectre of Brexit, of course, looms large, with the possibility of a hard exit creating additional uncertainty. The forecast warns that the outlook for the Irish economy remains ‘clouded by uncertainty’ particularly due to the possibility of Britain crashing out of the EU without a deal.

Meanwhile, Bank of England governor Mark Carney continues the weather analogy warning of the “fog of Brexit” impacting negatively on the European economy. It predicts growth for the UK of 1.2% this year but the accuracy of this figure depends greatly on the outcome – still hugely unclear – of the Brexit process.

Being aware of these mounting risks is half of the job when it comes to looking at future economic outcomes. The other half is ensuring the right mix of policies, such as facilitating investment, carrying out structural reforms and pursuing prudent fiscal policies. The European Commission’s next comprehensive forecast will be an interesting one, the Spring 2020 Economic Forecast is due this coming May.

The view of the European Central Bank

The European Central Bank on 7 March 2019 slashed its growth and inflation forecasts for 2019 as “uncertainties” ranging from geopolitical risks to trade rows darken the eurozone economy. Unveiling updated forecasts, ECB chief Mario Draghi said the bank now expects the region’s economy to expand by just 1.1% this year, down from 1.7% previously.

The ECB’s revisions come as fears grow over a global slowdown in the face of Brexit uncertainty, US-led trade tensions and sluggish Chinese growth.

Draghi said the bank was forecasting inflation of 1.2% this year, a significant downward adjustment to the 1.6% it had forecast previously and putting the ECB’s target price growth of just under 2% much further out of reach.

Draghi stressed that the bank stood ready to take action to combat the slowdown. These measures include holding off on any interest rate hikes until at least the end of the year and the launching a new round of stimulus targeted at increasing liquidity in the banking sector.

These early interventions by the ECB are intended to send a positive signal to the global economy and to reassure the EU member states that the ECB is ready to support the EU’s financial sector in the event that the going gets tough.  Which despite the positive projections for Irish growth is a very welcome.