Ibec predicts slowdown in growth as economy hits full capacity

Employers’ group also says Brexit uncertainty may dampen SME lending

Ibec chief executive Danny McCoy said the current uncertainty regarding the UK’s future trading relations had already prompted a slowdown in SME lending. Photograph: Alan Betson

Ibec chief executive Danny McCoy said the current uncertainty regarding the UK’s future trading relations had already prompted a slowdown in SME lending. Photograph: Alan Betson

 

Employers’ group Ibec is predicting a major slowdown in growth this year as the Irish economy approaches full capacity and “cost competitiveness erodes”.

In its latest quarterly outlook, Ibec forecasts headline growth of 4.1 per cent for 2019, down from the near 8 per cent recorded in 2017. This is lower than the Government’s forecast of 4.2 per cent.

While predicting a positive outlook for employment and consumer spending, Ibec said growth would “be weaker than in recent years as Ireland is now at a mature phase of the business cycle with the economy close to capacity”. It also cautioned that the outcome of the Brexit process, which has yet to play out, would “largely determine” Ireland’s economic fortunes in 2019.

Businesses here were facing into a difficult period due to the weakness of sterling, which has eroded the competitiveness of exports, and the continued Brexit uncertainty, it said.

In a no-deal scenario, the Bank of England has forecast that sterling could depreciate by up to 25 per cent. Ibec said this could see sterling at an unprecedented 110p versus the euro in 2019.

“At these levels, large numbers of Irish firms would not have sufficient margins to supply the UK market without complete price pass-through to British consumers,” it said.

Lending slowdown

Chief executive Danny McCoy noted that the current uncertainty regarding the UK’s future trading relations had already prompted a slowdown in SME lending as companies held off making investment decisions.

“Many companies are also implementing very costly contingency measures such as holding higher stock levels,” he said, noting that almost 70 per cent of exporting firms do not have experience of dealing with tariffs and customs arrangements.

“These companies will therefore need supports for enterprise stabilisation, cashflow and diversification if close trading ties with the UK are not maintained post March 29th, 2019,” Mr McCoy said.

Ibec’s report comes as the UK begins planning for the possible chaos of a no-deal Brexit.

UK authorities are due to begin testing how its road network would cope with a tailback of up to 150 lorries caused by disruption at its most important trading gateway to Europe, the port of Dover.

Prime minister Theresa May is trying to get her compromise Brexit deal through parliament but if it is rejected then the UK will either leave without a deal or perhaps seek to delay the process.

In the wake of last week’s year-end exchequer returns, which showed the Government generated a small exchequer surplus in 2018 for the first time in more than a decade, Ibec said while the economy was in a good position to face the Brexit challenge, Government finances remained vulnerable.

It said the surplus was largely a function of bumper corporation tax receipts on foot of changes to global tax rules.

In the face of repeated warnings the Government was using this windfall to fund current spending, Mr McCoy said.

“While there are no immediate signs that this revenue will fall, there is no guarantee the upward trajectory will continue, particularly given current tensions surrounding global trade which pose a threat to foreign direct investment levels in Ireland,” he said.

“This is reminiscent of mistakes made in the past when government finances relied heavily on property-related revenues,” he added.