Ireland’s economic outlook ‘clouded in uncertainty’, EU warns

If Brexit or tax reform don’t undermine growth, economy is at risk of overheating

A European Commission report says that growth in the euro zone exceeded expectations in the first quarter of the year. Photograph: iStock

A European Commission report says that growth in the euro zone exceeded expectations in the first quarter of the year. Photograph: iStock

 

Ireland’s economic outlook remains “clouded in uncertainty”, the European Commission has warned in its summer economic forecast. Brexit and changes in the international taxation environment, combined with “the difficult-to-predict activities of multinationals could drive [Irish] headline growth in either direction”, the report says.

“Brexit remains a major source of risk,” Valdis Dombrovskis, commission vice-president for the euro, warned, echoing its findings.

And “in the absence of major negative external shocks, the risk of overheating could increase in the near term”, the report says, cautioning the Government against the use of windfall corporation tax receipts to pay for current spending and stimulating demand.

“The tight labour market and diminishing spare capacity point to an economy possibly operating above its potential,” the report says. “The use of volatile and potentially short-lived foreign-company sourced corporation tax receipts to stimulate domestic demand would also fuel overheating.”

The commission predicts Irish GDP growth at 6.7 per cent in 2018, declining to 4 and 3.4 per cent in 2019 and 2020 respectively. Consumer prices are expected to rise by 1.1 and 1.3 per cent in the next two years.

The European economy overall is set for its seventh consecutive year of growth in 2019, with all member-states’ economies due to expand

In the euro zone the commission’s growth forecast remains unchanged. Overall, the euro zone economy is set to continue expanding this year and next, though annual growth is forecast to slow from 1.9 per cent in 2018 to 1.2 per cent in 2019 (1.4 per cent in the wider EU) before firming up at 1.4 per cent in 2020 (1.6 per cent in the EU).

Temporary factors

The report says growth in the euro zone exceeded expectations in the first quarter of the year, driven by domestic demand.

“However, the economy’s strong performance was flattered by a number of temporary factors, such as stockpiling in the UK ahead of the original Brexit date, the mild winter and the rebound in car sales.

“Their positive impulse is set to unwind in the second quarter and likely weigh on activity. Further ahead, the rebound anticipated later in the year now looks weaker, as the global manufacturing cycle has yet to bottom out and the outlook for trade and investment continues to be clouded by protectionism and uncertainty,” the report says.

The euro zone growth outlook is thus “subject to risks that are skewed to the downside and appear even more interconnected than before at this fragile juncture in the global economy”.

“Any further escalation of trade tensions and an increase in policy uncertainty, could prolong the current downturn in global trade and manufacturing and trigger a sharp shift in global risk sentiment and rapid tightening of global financial conditions.”

This, the report says, adds to concerns about the medium-term outlook in China and the recent intensification of geopolitical tensions in the Middle East.

On the domestic side, “given the purely technical assumption of status quo in terms of trading relations between the EU27 and the UK”, a “no deal” Brexit remains a major source of risk.

Speaking to journalists in Brussels, Mr Dombrovskis said: “All EU economies are still set to grow this year and next, even if the robust growth in Central and Eastern Europe contrasts with the slowdown in Germany and Italy. The resilience of our economies is being tested by persisting manufacturing weakness stemming from trade tensions and policy uncertainty.

“On the domestic side, a ‘no deal’ Brexit remains a major source of risk.”

The Commission publishes four economic forecasts each year.