Ibec predicts 2.8% economic growth next year

Upbeat assessment believes Ireland back on track for ‘virtuous cycle’ of expansion

Ibec’s head of policy and chief economist Fergal O’Brien: “We’re going to have 60,000 more people taking home a paycheque this Christmas than we had last year.” Photograph: Eric Luke/The Irish Times

Ibec’s head of policy and chief economist Fergal O’Brien: “We’re going to have 60,000 more people taking home a paycheque this Christmas than we had last year.” Photograph: Eric Luke/The Irish Times

 

Ireland is embarking on a new era of “strong economic growth” fuelled by a rebound in domestic activity and recovery in international markets, according to Ibec.

In its most upbeat assessment of the economy since the 2008 crash, the employers’ group forecasts growth of nearly 3 per cent next year, significantly ahead of the Government’s projection of 2 per cent.

The group, which warned the Irish economy was dangerously overheating back in 2007, said there was extensive evidence the economy was returning to a “virtuous cycle of growth”. However, in its final quarterly economic outlook of 2013, it cautioned “much more reform” was needed to safeguard the public finances in the post-bailout era.

Specifically, it highlighted the €120-billion hole in the public sector pension pot as unsustainable.


Significant upturn
In its report, Ibec said a significant upturn in economic activity over the last two quarters, illustrated by improving labour market conditions, was not reflected in gross domestic product figures. As a result, it predicted GDP growth would come in at a weaker-than-expected level of less than 1 per cent this year.

However, as the fiscal drag from the “patent cliff” wears off and exports growth in international markets recovers, Ibec said GDP growth would jump to 2.8 per cent next year, its highest level in six years.

The improving climate was likely to see employment growth accelerate from -0.5 per cent last year to 2.5 per cent this year and 2 per cent in 2014. “The most relevant indicator of what’s happening out there in the economy is the 2.5 per cent employment growth number we’re going to see this year. That really is spectacular,” Ibec’s head of policy and chief economist Fergal O’Brien said.

“We’re going to have 60,000 more people taking home a paycheque this Christmas than we had last year.”

He pinpointed services export growth as a major contributor to employment growth, noting services exports eclipsed goods exports in terms of value for the first time in 2012. Ibec said the export sector had been the biggest disappointment during 2013, with exports in the first half 3 per cent down on 2012.

However, improving services trade coupled with a pick-up in demand in international markets would see export growth increase to 4 per cent next year.

“While the stronger euro has been a headwind this year, improved competitiveness is supporting market share gains for many businesses,” it said.

Mr O’Brien said it was somewhat surprising consumer spending recovery appeared to have lagged the “exceptional” labour market buoyancy, noting the unexpected 1.2 per cent drop in consumer spending in the first half of the year.

He put this down to an increasing amount of consumer spending going into services, such as the hospitality sector, rather than retail. The other aspect of this anomaly, he said, was the growth in online shopping which was not being picked up by conventional retail sales numbers. The property tax was probably another factor, Ibec said in its report.

Mr O’Brien said the country was exiting the bailout in a much stronger position than most would have predicted.


Recession lessons
However, he said to avoid falling back into the age-old trap of boom/bust cycles and to show we had learnt the lessons of the crisis there needed to be strict adherence to fiscal compact rules and sound fiscal management. This would require ongoing reform and efficiency in public sector spending, he said. “To be specific, we have a €120 billion liability on the State in terms of public sector pensions that have not been sufficiently reformed.”

On taxation, Ibec welcomed Minister for Finance Michael Noonan’s signal he may consider tax breaks in budget 2015.

The group said Ireland had one of the highest marginal tax rates in the OECD at 52 per cent, well above the average of 36 per cent.