BoI Chief Economist: Economy sailing on but choppy waters ahead
Irish economy to grow by 6.5% in 2018, UK by 1.5%
The latest Ireland Outlook from Bank of Ireland highlights that a host of metrics indicate that the Irish economy is performing well. Bank of Ireland is revising up its GDP growth forecast for this year to 6.5% (from 4.7% previously). A figure of 4.2% has been pencilled in for 2019, assuming a transition period that maintains current UK-EU trading arrangements.
Discussing the latest Economic Outlooks, Dr Loretta O’Sullivan, Group Chief Economist, Bank of Ireland said: “Mid-way through the year and households are spending, with consumer confidence at a high level and job gains, rising incomes and subdued inflation providing support. Firms are benefitting from the expanding domestic and global economies and business confidence has strengthened in recent months, while the construction upturn is continuing apace.
“The outlook is also positive but it may not be all plain sailing in the second half of the year. External risks have ratcheted up in the last while and choppy waters lie ahead. The threat of a disruption to global trade and renewed uncertainty around Brexit and whether a withdrawal agreement can be successfully concluded in line with the autumn timetable may temper the mood a little over the coming months.
“However momentum in the economy remains strong and on the back of this and a good GDP number in the year to the first quarter of 2018, we have revised up our growth forecast for this year. Further, looking at what is arguably the most important gauge of what is happening on the ground, the unemployment rate is projected to average 4.5% next year, a level not seen for over a decade.”
Strong consumer tailwinds
Consumer spending rose by 2.7% year-on-year in the first quarter of 2018. Retail sales were positive in April and May, though new car sales are continuing to lose out to imports from abroad. Annual hourly earnings also grew by 2.7% in the opening months of the year, which is helping the buying climate, as is the ongoing reduction in the household debt ratio. And with consumers upbeat in the main, the scene is set for spending increases in the region of 3% both this year and next.
Healthy labour market
There were job gains of 62,100 (2.9%) year-on-year in Q1 and over 2.2 million people are now at work. Employment is set to increase again in 2019 which should take the unemployment rate down to 4.5%, a level not seen in over a decade.
Inflation still weak
Consumer price inflation was subdued at an annual rate of 0.2% in the first half of the year. Some upward pressure is on the cards in the period ahead though, as energy suppliers raise prices and the impact of the past depreciation of the pound starts to wane. For 2018 as a whole, a figure of 0.4% is forecast, rising to 1.2% next year.
Globalisation effects clouding investment picture
Total investment was down 3.8% year-on-year in Q1 2018. However, the situation is much improved when volatile R&D-related intellectual property imports and aircraft leasing are excluded, with modified investment posting double digit growth during this period. Construction activity is continuing apace and the first quarter also saw a welcome rebound in machinery and equipment investment. Looking ahead, the renewed uncertainty around the Brexit process is a concern, while infrastructure is a challenge for firms on the home front. Some unwinding of the globalisation factors that boosted investment in recent years is also likely over the forecast horizon and will weigh on the total figures. But with the domestic and global economies growing, underlying investment is expected to expand at a solid pace.
Global economy expanding but trade tensions
With exports up 6.1% on an annual basis in Q1 2018 and imports down 1.1%, net exports made a significant contribution to GDP growth. FDI investments in the first half of the year were also up and with our key trading partners expanding – the US economy strongly, the euro area solidly and the UK more moderately – we are forecasting export growth of 5.7% this year and 4.5% in 2019. Trade tensions are a risk though and as always, an eye will need to be kept on currency moves. The pound has been in a tight range of 86p-89p against the euro of late but will be sensitive to developments in the Brexit negotiations and remains a headwind for many exporters, while the dollar has gained some ground which is a positive for others.
UK Economy in a holding pattern amid Brexit uncertainty
Dr Loretta O’Sullivan, Group Chief Economist, Bank of Ireland said; “While it has been a game of two halves for the UK economy over the first six months of 2018 – poor weather dampening activity in the first quarter but brighter skies, the Royal Wedding celebrations and the World Cup providing a boost in the second – the underlying picture is one of moderate growth. It is still unclear whether a Brexit withdrawal agreement can be successfully concluded in line with the autumn timetable – the government’s White Paper on the future relationship with the EU has at least helped to move the talks on – but assuming there is a transition period, the outlook is for more of the same.
“We are forecasting GDP growth of 1.5% this year (revised down a touch from 1.7%) and 1.6% in 2019 (unchanged). The prospects for consumer spending are a little better at the current juncture. With stronger momentum in the labour market, earnings growth firming and inflation slightly lower, some welcome support is in store for household incomes. While there are trade tensions, the global expansion should underpin exports and business investment; though the boost to the former from sterling’s past fall should fade while uncertainty will remain a drag on the latter. Following on from Bank of England’s decision to raise interest rates last November we expect a quarter point hike in August. While sterling has been relatively stable against the euro in 2018 to date, as the prospect of rate increases has helped offset Brexit concerns, it will be sensitive to developments in the negotiations.”