Even through cautious eyes, the economic outlook looks positive

Ireland should be one of the fastest-growing economies for a fifth straight year in 2018, writes Philip O’Sullivan

Irish headline economic data have to be treated with caution given the distortions caused by the multinational sector.

If you were to rely on GDP to tell the story of the past few years, you would conclude that the recession ended in late 2009 and the economy staged a remarkable recovery thereafter, expanding by around 60% from the trough.

Of course, few in Ireland would believe such a narrative, not least because the jobless crisis didn’t reach its worst point in the downturn until early 2012, when the 352,700 people who were then out of work equated to an unemployment rate of 15.9%.

For us, it is that human angle that best tells the story of Ireland’s economic renaissance.

Some of the 20 houses being built as part of the regeneration project in Knocknaheeny, Cork City. The country needs 30,000-50,000 house completions a year. Picture: Larry Cummins

From those dark days, unemployment has steadily reduced to the current nine-and- a-half year low of 6.1%, while the number of people with a job in Ireland has increased by close to 300,000 to the current level of a little over 2.1m.

Contrary to some recent assertions, the recovery in the labour market is of a high quality. The latest CSO data show that 79% of those with a job work full-time, a proportion that has improved in tandem with the economic strengthening and is now back to levels last seen in early 2009. The number of part-time workers who said that they were underemployed has fallen by almost half over the past five years.

Average weekly earnings are now at an all-time high, with consumers’ spending power further bolstered by the modest income tax cuts unveiled in the past four budgets. Rising employment and earnings have, unsurprisingly, helped to produce another good year for the retail sector in Ireland. On a headline basis, retail sales volumes were up 4.2%, year-on-year, in the third quarter, with the increase in value terms a more pedestrian 1.7% increase.

Turning to the export markets, Ireland’s report card has been very good this year, despite some adverse currency moves. Goods exports were ahead by 2%, year-on-year, in the first nine months of 2017, while the trade surplus widened by 3% in the same period to €35bn. While there is still a road to travel in the Brexit talks, we welcome the recent signs of progress.

Another area that has seen some progress, albeit not to the extent that we would like to see, is house-building. Completions, as measured by ESB connections, rose 28%, year-on-year, in the first 10 months of the year to 15,062 units.

If that growth rate is maintained, it would imply completions of 19,000 in 2017, a fourth successive year of improvement.

However, the country needs a minimum of 30,000 — and up to 50,000 by some estimates — completions a year just to keep up with demographic factors and obsolescence. Until the gap between supply and demand is closed, it is hard to see how house prices will fail to keep rising and the story is similar in the rental market.

What are the key themes that we expect to see in 2018?

To start with the Irish economy, it is clear that it has very strong momentum behind it going into the new year.

Blockbuster national accounts data for the third quarter of 2017 — with GDP rising by 10.5%, year-on-year — see us upgrade our 2017 GDP growth forecast to 7% from the previous 4.8%. Granted, specific factors relating to the multinationals do slightly flatter this headline growth rate.

However, even using the modified total domestic demand figure to ascertain a better read on the health of the underlying Irish economy still reveals a very strong performance, with growth here running at 4.9%, year-on-year, in the first nine months of the year.

Lead indicators show that the economy is going to exit 2017 with a strong tailwind behind it, suggesting upside risk to our unchanged GDP forecast of 4.4% growth for 2018.

The main risks to our positive growth story are external. Brexit and US policy changes pose potential challenges, but an element of this is probably already priced in given moves in the currency markets.

As the world’s leading central banks continue to slowly move away from the era of ultra-cheap money, this will have implications for Irish firms and households alike, although we still don’t see the ECB hiking its base rate until the third quarter of 2019 at the earliest.

Domestically, a chronic lack of housing in the cities and skills shortages in a number of areas are the main problems that need to be addressed. The outlook remains positive, with Ireland set to be one of the fastest growing developed economies in the world for a fifth successive year in 2018.

Philip O’Sullivan is chief economist with Investec Ireland

KEYWORDS: Economy, Housing


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