The latest Quarterly Economic Outlook from Bank of Ireland points to healthy growth in employment, an increase in GDP, sustained consumer spending and further export growth. Bank of Ireland’s Group Chief Economist, Dr Loretta O’Sullivan, has revised her 2017 GDP outlook from 3.0% to 3.2%. GNP is projected to increase by 3.0% this year.
The rise in employment is set to continue in 2017, albeit at a slower pace, with growth of 2.3% projected this year, equating to c. 46,000 new jobs. Employment growth is also on the cards for 2018, with an increase of 1.8% projected. Rising employment has done much to lower the unemployment rate, which in January 2017 was 7.1% and is set to fall further to below 6% by the end of next year.
Discussing the latest Quarterly Outlook, Dr Loretta O’Sullivan, Group Chief Economist, Bank of Ireland said: “2016 was an eventful year. The general election and industrial unrest at home, the UK voting to leave the EU and the outcome of the US Presidential election also made it an uncertain year. Against this background, the economy has held up well with annual GDP growth averaging 4.6% in the first three quarters. So far, the main impact of these developments has been some softening in sentiment among consumers and businesses, and a weaker pound which is affecting firms selling into the UK market. While the external situation remains unsettled, the outlook is for continued growth in Ireland.
“Developments at home and abroad took their toll on sentiment over the course of 2016, with Bank of Ireland’s Economic Pulse ending the year below where it started it, albeit still at a relatively high level.”
Domestic activity to dominate
Domestic activity is set to take over from net exports as the key driver of the economy, with ongoing job and income gains supporting consumer spending and an uptick in residential construction and core business investment also helping. Despite some headwinds, the export sector should contribute as well as our key trading partners continue to expand. On the back of all of this, the unemployment rate which is already at an eight year low is projected to fall further, to below 6% by the end of next year.
Sustained consumer spending
Consumer spending in the first three quarters of 2016 rose by 3.2% year-on-year. This solid performance was driven by continued gains in employment and incomes. Increases were evident across a broad range of retail categories, not least car sales which came in at over 140,000 last year, the most since 2008. Budget measures and the falling level of household debt will also provide support over the forecast horizon, though uncertainty and the projected modest increase in inflation may weigh on confidence and households' spending power respectively. Allowing for this, and given healthy spending over the past two years, Bank of Ireland expects personal consumption growth to ease back to 3.2% in 2017 and 3.0% in 2018. On the Government side, spending increases of 2.5% are pencilled in for each year.
Investment to pick up
Investment was very volatile during 2016, with a sizable jump in Q2 in between two quarters of decline. This owed much to fluctuations in spending on intangibles (which tends to be dominated by multinationals). The disappointing performance of core business investment last year may be partly down to the impact of a specific one-off and Bank of Ireland expects some rebound in the coming years. While uncertainty could weigh on sentiment, the flow of FDI remains strong - the IDA reported a record number of investments in 2016 – and domestic activity should support SMEs. Residential construction activity is also projected to tick up in the period ahead. Overall investment growth of 7.5% is forecast for this year and 6.0% next year.
Export growth over the first three quarters of last year averaged 2.1% in annual terms, more modest than in recent years. Outsourcing by multinationals (contract manufacturing) looks to have been subdued and has impacted goods exports in particular. External developments were a concern and the weaker pound has hit firms selling into the UK market, especially those in price sensitive smaller indigenous sectors. On the positive side, our main trading partners - the US, UK and euro area - are continuing to expand. Notably, the UK economy has proven more resilient than anticipated post the Brexit vote and we have revised up our GDP growth forecast for the UK to 1.6% this year (from 0.7% in our July Outlook). For 2017, Irish export growth of 4.5% is projected and 4.3% in 2018, while imports are expected to increase by 5.6% and 5.3% respectively.
Inflation to turn positive
Inflation has been subdued throughout 2016. Low oil prices for much of the year and the ongoing impact of past reductions in mortgage interest rates did much to dampen the headline rate of CPI inflation, which averaged 0% for the year as a whole. While there is still some spare capacity in the economy and the weaker pound should push down on import costs, inflation is expected to pick up over the forecast horizon as domestic activity provides support, and the recent increase in oil prices following the OPEC agreement starts to feed through. With these factors in mind Bank of Ireland is projecting CPI inflation of 0.7% in 2017 and 1.2% in 2018 (the corresponding HICP forecasts are 0.8% and 1.2%).