Cliff Taylor: The economy is slowing – we better get ready

Irish economic growth is slowing. It is now impossible to conclude otherwise. Pretty much every indicator is now pointing to this, from tax returns to confidence indicators, to retail sales and industrial production data. The big bounce back from the economic crisis, when growth was stronger than pretty much anyone expected, is coming to an end. Blame Brexit, blame whatever you want, but it is happening and it is going to have consequences.

One is that the scramble for increases in public sector pay, now well under way, will have to be met by Government in the context of tighter resources. Spending more in one area means either raising taxes, or spending less elsewhere. The Government is trying to hold the line on the Lansdowne Road agreement after the Garda proposals, but will come under increasing pressure.

It will find, heading into 2017, that it faces tough choices if it decides to make more concessions. The Department of Finance laid it on the line in the latest exchequer returns by pointing out that tax revenues would have to be strong in November and December to pay for the Government's extra spending commitments to health, justice and other areas made during 2015.

If tax growth does not pick up, spending departments will be put under pressure to not spend their full allocations by year end, or we will have to borrow a bit more. There is enough leeway to ensure this should not be a big problem this year. But slower growth in 2017 would make these choices more acute, as tax buoyancy would be less and the room for manoeuvre would shrink.

It is important, first, to put this in context. Forget the leprechaun economics official data – our underlying economy has probably been growing by around 5 per cent a year in real terms over the past few years. Against the backdrop of hardly any growth elsewhere, this has been a strong performance.

Risks

The indications are that the economy will continue to grow. Many argue that, given a fair wind, we could maintain growth of 3- 4 per cent in the years ahead. But right now the rate of growth is slowing, and this brings risks. For it to “feel” like a growing economy, and for our Government budget numbers to add up, we need growth to hang in at more than 3 per cent over the next few years.

It may do, but this is far from guaranteed. The latest confidence indicators for the services sector show the lowest reading since May 2013 and suggest that weakness in the manufacturing sector – hit by a weak sterling and sluggish international markets – is feeding through into services. Davy stockbrokers warned that these indicators are consistent with an annual growth rate of less than 3 per cent. The latest retail sales figures suggest that people are still spending but new car sales in particular look to be quickly running of steam.

Brexit is, of course, a key factor hitting confidence in Ireland and in the UK, our biggest export market. The fall in sterling has had an impact, and sources believe there will be a pick up in redundancies from exposed indigenous firms in early 2017.

And then there is the uncertainty. We do not know the terms on which we will trade with our nearest neighbours, or whether the freedom to travel to and work in the UK will remain. Unless Theresa May’s government reverses course then this could, as Taoiseach Enda Kenny said this week, get vicious.

For the moment, Brexit has introduced a serious note of caution for many – and how it plays out will have a big impact on our long-term growth prospects. So will the US election. If Donald Trump wins next week, the Irish economy will face a double whammy of international uncertainty.

Trump has promised an aggressive approach on trade, though China and Mexico are more likely initial targets than Europe. Trade deals will fall apart. He has also pledged to ensure that US companies invest at home rather than abroad. For a small economy reliant on the globalisation trend and the growth of international trade and investment, this has obvious dangers for Ireland.

Momentum

Ireland has the potential to continue to growth at respectable rates. But we do need a favourable international backdrop to grow, and so there are now two big threats. We do enter this period with some momentum – jobs growth has been solid and investment and consumer spending have recovered. Tax factors have pushed significant investments from big multinationals here. We will get some Brexit-related new investment too. There are reasons to remain confident in the long-term potential of the economy.

The Irish problem is that we have not been very good at chugging along at respectable growth rates. It tends to be either boom or bust, full speed or reverse. We haven’t been able to find a way to just motor along in third gear. Looking at the GDP growth rates since the mid 1990s, there is only one year when growth was not either higher than 4 per cent or lower than 1.5 per cent. We simply haven’t done middle of the road 2-4 per cent growth. We don’t do soft landings, we do rollercoasters. Even allowing for the odd nature of our national statistics, this is remarkable.

With Brexit on the horizon and Trump in the wings, forecasting is even tricker than usual. But the few years of super-charged growth and of smashing our growth and budget targets each year are coming to an end. And the trouble is everyone is now shouting for a share of a cake which is going to be expanding at a more modest rate.