Commission cuts Irish growth forecast amid Brexit uncertainty

The European Commission has cut its growth forecasts for the Republic amid the current Brexit impasse, suggesting the economic outlook "remains clouded by uncertainty".

In its latest batch of quarterly forecasts, the EU’s executive arm predicted the Irish economy would grow by 4.1 per cent this year, down from 4.5 per cent previously. This is lower than the Government’s forecast of 4.2 per cent and reflects the State’s precarious position in the Brexit process.

The commission also forecast that growth here would moderate further to 3.7 per cent in 2020.

It said the revised projections for Ireland related “primarily to the terms of the UK’s withdrawal from the EU”, but also to global trade tensions between the US and China and to potential changes to the international tax environment.

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“As a highly open economy, Ireland is particularly exposed to changes in the international taxation and trade environment,” the commission said.

“The huge impact of the often unpredictable activities of multinationals, could drive headline growth either up or down,” it said.

On the positive side, the commission said robust employment developments, stronger wage growth and weak inflation would further support private consumption.

Nonetheless, it warned the ongoing Brexit uncertainty could dent Irish consumer confidence, posing downside risks to consumer spending.

In terms of the EU as a whole, the commission slashed its growth forecasts for all the euro region’s major economies from Germany to Italy and warned that Brexit and the slowdown in China threaten to make the outlook even worse.

Delivering its most downbeat assessment in several quarters, it shaved a whole percentage point off its 2019 projection for Italy, now seen with minimal expansion of just 0.2 per cent for the whole year. Officials in Brussels warned that the region’s outlook faces “substantial” risks.

The gloomier outlook reflects more pronounced weakness in the region, which stumbled at the end of 2018 as political instability continued to rock Italy, violent protests in France depressed output, and Germany’s car industry struggled to rebound from changes in regulation.

External risks

Global trade uncertainty and a sharper-than-expected slowdown in China also pose external risks to the economic outlook.

In its forecasts, the commission sees the 19-nation euro zone economy expanding 1.3 per cent this year down from 1.9 per cent projected in November. For 2020, it sees growth of 1.6 per cent, down from 1.7 per cent forecast earlier.

Growth in the 27-nation European Union – without Britain, which is planning to leave in March – is expected to slow to 1.5 per cent this year from 2.1 per cent in 2018. Next year, the bloc is forecast to expand by 1.8 per cent.

All EU countries are poised to continue growing, with the bloc expected to post its seventh consecutive year of expansion, but the larger member states will brake significantly.

In Germany, the bloc’s largest economy, growth is expected to slow to 1.1 per cent this year from 1.5 per cent in 2018. The commission had previously forecast 1.8 per cent growth for Germany this year.

France, Italy, Spain and the Netherlands are also forecast to reduce the pace of their expansion.

Italy’s downward revision was the starkest, with the commission seeing growth slowing to 0.2 per cent – the lowest in the bloc by far – compared with its forecast of 1.2 per cent just three months ago. The lowered outlook comes two months after Rome and Brussels reached a compromise over Italy’s deficit target and will likely make it more difficult for the populist coalition to carry out its expansive spending plans.

Clouds gathering

“Much of the euro area’s loss of growth momentum can be attributed to fading support from the external environment, including slower global trade growth and high uncertainty regarding trade policies,” the commission said. “However, there have also been a number of domestic factors at play,” it said, pointing to social tensions and budget-policy uncertainty in some countries, as well as weakness in the car industry.

Clouds on the horizon are also getting darker, the commission said. “In the US, the risk of an abrupt fiscal tightening appears to have increased, especially for 2020,” according to the report. “The Chinese economy might be slowing more sharply than anticipated while many emerging markets are still vulnerable to sudden changes in global risk sentiment.”

For the EU, Brexit remains a source of uncertainty, the commission said.

An increasingly anaemic economy will test the resolve of the European Central Bank in sticking to its plans to gradually pare back its crisis-era stimulus. ECB policy makers already walked a fine line in December by downgrading economic forecasts at the same time as ending net asset purchases that have helped buoy euro-area demand.

On inflation, the commission cut its 2019 euro zone forecast to 1.4 per cent, down from 1.8 per cent in earlier projections. The ECB aims to get inflation to just below 2 per cent over the medium term. – Additional reporting Bloomberg / Reuters