Economic outlook: hazards on the horizon

The Irish economy is growing quickly, but Brexit and US tax reform are big sources of uncertainty

Jill Forde, Mark Cassidy and John Flynn of the Central Bank at the publication of the quarterly bulletin in Dublin on Thursday. Photograph: Dara Mac Dónaill

Jill Forde, Mark Cassidy and John Flynn of the Central Bank at the publication of the quarterly bulletin in Dublin on Thursday. Photograph: Dara Mac Dónaill

a
 

The pace of Irish economic growth in recent years has taken most forecasters by surprise and the latest Central Bank bulletin says more of the same is to come, with GDP expected to rise by 4.8 per cent this year and 4.2 per cent next year. However, the headline on the bank’s summary of its finding – “Strong growth forecast, but take nothing for granted” – reflects the real difficulty facing those making economic predictions. Uncertainties ahead make the job of forecasting even riskier than usual.

On any measure, economic growth is now robust and broadly based. It is delivering a real dividend. The Central Bank forecasts the economy can continue to create a net 1,000 jobs a week over the next two years, bringing the unemployment rate under 5 per cent by 2019. Wage growth– which was lacklustre in the early years of recovery– is expected to run at an annual rate of 3.3 per cent, giving a boost to living standards.

While policymakers may not make the same mistakes as those in the mid-2000s, there is a risk of making new ones

However, there are uncertainties, too. The Central Bank points to the impact of US tax reform on the locational decisions of US companies as one key risk. And then there is Brexit. An agreement that a transition period would apply after the UK leaves, keeping trading arrangements much as they are until the end of December 2020, could remove the immediate risk. But this deal on a transition period falls if there is no overall agreement, meaning the risk of a hard Brexit next March can by no means be dismissed. Indeed in a report published today business advisers PwC still see it is the most likely outcome.

This is a particularly tricky backdrop for policymakers – and indeed businesses and consumers. The Government must be conscious, as the budget approaches, both of the risk of parts of the economy overheating, and also of a shock to growth, which could quickly hit employment and revenues. It argues for caution in the budget, a focus on investment to tackle bottlenecks, maintaining competitiveness and seeking value for money in improving vital services. The Government also need to leave scope in the finances in case, for example, there is a hard Brexit. There is no need to stimulate the economy via budgetary measures – and this will mean facing down many demands for lower taxes and big increases in spending which are already emerging.

The Central Bank advises that economic choices must be “robust to unanticipated outcomes”, rather than relying on its central forecasts. While there are some similarities to the run-up to the last economic crash – notably in the housing market – conditions now are different. But while policymakers may not make the same mistakes as those in the mid-2000s, there is a risk of making new ones. Betting the house on GDP growth continuing at 4 per cent plus each year and then facing another painful adjustment if this does not happen would be unforgiveable.

a
The Irish Times Logo
Commenting on The Irish Times has changed. To comment you must now be an Irish Times subscriber.
SUBSCRIBE
GO BACK
Error Image
The account details entered are not currently associated with an Irish Times subscription. Please subscribe to sign in to comment.
Comment Sign In

Forgot password?
The Irish Times Logo
Thank you
You should receive instructions for resetting your password. When you have reset your password, you can Sign In.
The Irish Times Logo
Please choose a screen name. This name will appear beside any comments you post. Your screen name should follow the standards set out in our community standards.
Screen Name Selection

Hello

Please choose a screen name. This name will appear beside any comments you post. Your screen name should follow the standards set out in our community standards.

The Irish Times Logo
Commenting on The Irish Times has changed. To comment you must now be an Irish Times subscriber.
SUBSCRIBE
Forgot Password
Please enter your email address so we can send you a link to reset your password.

Sign In

Your Comments
We reserve the right to remove any content at any time from this Community, including without limitation if it violates the Community Standards. We ask that you report content that you in good faith believe violates the above rules by clicking the Flag link next to the offending comment or by filling out this form. New comments are only accepted for 3 days from the date of publication.