European Commission forecasts ‘robust expansion’ of Irish GDP

The European Commission is forecasting a robust expansion of Irish gross domestic product (GDP), but at a moderating pace. The commission expects GDP to grow by 4 per cent in 2017 and 3.6 per cent in 2018. That growth is far above the expected euro area GDP growth of 1.7 per cent in 2017 and 1.8 per cent in 2018.

Earlier this week Davy Stockbrokers predicted that GDP would grow by 5 per cent in 2017, up from their previous forecast of 3.7 per cent.

"Today's economic forecast shows that growth in the EU is gaining strength and unemployment is continuing to decline. Yet the picture is very different from Member State to Member State, with better performance recorded in the economies that have implemented more ambitious structural reforms", said Valdis Dombrovskis, Vice-President for the Euro and Social Dialogue.

Referring to the figures for 2016, when real GDP grew by 5.2 per cent, the commission’s spring economic forecast said “some of the impressive headline figures are still heavily distorted by the activities of multinational enterprises in the country. Nevertheless, domestic activity appears to have been strong driven by positive developments in the labour market, consumption and construction investment.”

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The commission expects public finances to improve but, it notes that risks to the fiscal outlook remain. In 2016, the general government deficit fell to 0.6 per cent of GDP which “echoed the sustained pace of Ireland’s economic growth”, according to the spring forecast.

But Ireland’s growth could be hampered by “external risks”, mainly reflecting policy uncertainty and risks to the global economic outlook. The commission forecasts the government deficit to fall slightly to 0.5 per cent of GDP in 2017 based on expectations of “robust increases in tax revenue and buoyant current primary expenditure amid public wage pressures.”

Jobs and domestic demand are expected to underpin Ireland’s economic activity. The commission forecasts a slow inflation recovery due to “upward pressure from the services sector including rapidly increasing residential rents, related to the limited supply of residential property.” However, it reports that the labour market’s better-than-expected performance, combined with continued robust wage growth and improving household balance sheets, will support consumption in 2017 and 2018.

On the trade front the commission expects exports to contribute marginally to GDP growth both this year and next despite the fact that export growth slowed last year and ultimately had a negative impact on GDP growth.

The main risks to Ireland's macroeconomic outlook include the "considerable uncertainty" surrounding the final outcome of negotiations between the UK and the EU, "as well as potential changes to US tax and trade policies, to which Ireland is highly exposed."

"It is good news too that the high uncertainty that has characterised the past twelve months may be starting to ease. But the euro area recovery in jobs and investment remains uneven. Tackling the causes of this divergence is the key challenge we must address in the months and years to come", said Pierre Moscovici, Commissioner for Economic and Financial Affairs, Taxation and Customs.