EU upgrades Irish economy but warns of risks

The European Commission has significantly revised up its growth predictions for the Irish economy over this year and next. Growth is expected to come in at 5.7 and 4.1 per cent in 2018 and 2019 respectively, the commission predicts in its spring economic forecasts.

This is the second-fastest growth in the EU, just behind Malta at 5.8 per cent.

But “uncertainty around Ireland’s economic outlook remains elevated”, the report claims, “and relates primarily to the outcome of the [Brexit] negotiations between the UK and the EU as well as changes to the international taxation and trade environment”.

For the EU as a whole and the euro zone, the commission predicts a slight slowdown in growth this year to 2.3 per cent from 2.4 per cent in 2017, a 10-year high. Commissioner for Economic Affairs Pierre Moscovici acknowledged that the European economy had seen a dip in growth in the first months of 2018 but dismissed it as based on temporary factors, like the cold winter.

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“The European economy is in great shape,” he said. It had “finally turned the page of the crisis. For the first time in the history of the euro, all the participating states now stand with deficits below 3 per cent”.

The commission’s projections for the Republic say that “the strong growth in GDP is projected to moderate over this year and next. While volatility in the headline national accounts figures is likely to continue in the near term because of the role of multinational companies, the domestic economy is expected to remain robust, supported by positive labour market trends and investment in construction”.

“The Government deficit is moving closer to balance but risks to the fiscal outlook remain.”

The report notes that Irish growth figure for last year was somewhat unrepresentative because of the activities of multinationals. But a measure of domestic activity that strips out some of the effects of multinationals, grew by 3.9 per cent in 2017. “It was driven by private consumption and construction investment, and is projected to expand at an average rate of 4 per cent over the forecast period.”

The unemployment rate stood at 6.1 per cent in March 2018 and is forecast to drop below 5 per cent in 2019. Inflation is projected to increase by 0.8 per cent in 2018, mainly driven by higher services and energy prices, and by 1.1 per cent in 2019.

The headline Government deficit is projected to fall to 0.2 per cent of GDP in 2018, based on expectations of strong revenue growth, with earnings from personal income taxes and VAT reflecting the rise in employment and private consumption. The deficit is forecast to remain broadly stable in 2019.

After improving in 2017, the structural balance is expected to deteriorate in 2018 before improving again in 2019. The general Government debt ratio is projected to fall further to 65.6 per cent and 63.2 per cent of GDP in 2018 and 2019 respectively,

The report suggests real GDP growth in both the euro zone and EU will “ease” to 2 per cent “as bottlenecks become more apparent in some countries and sectors, monetary policy is adjusted to circumstances and global trade growth calms somewhat”.

“Private consumption remains strong, while exports and investment have increased. Unemployment continues to fall and is now around pre-crisis levels. However, the economy is more exposed to external risk factors, which have strengthened and become more negative,” the commission says.

The aggregate deficit for the euro zone is now less than 1 per cent of GDP and is forecast to fall under 3 per cent in all euro-zone states this year.

Unemployment in the euro zone is forecast to fall from 9.1 per cent in 2017 to 8.4 per cent in 2018 and 7.9 per cent in 2019. The number of people in work in the bloc is now at its highest since the introduction of the euro.

Inflation is forecast to continue at 1.7 per cent this year before rising to 1.8 per cent in 2019.