The latest Economic Outlook from Bank of Ireland points to a positive outlook for the Irish economy, with some headwinds resulting from an unsettled external environment. Bank of Ireland’s Group Chief Economist, Dr Loretta O’Sullivan, has revised her Ireland GDP growth forecast up to 4.8% in 2017 (3.2% previously) and to 3.8% in 2018 (previously 3.1%).
Discussing the latest Quarterly Outlook, Dr Loretta O’Sullivan, Group Chief Economist, Bank of Ireland said: “On the whole, 2017 got off to a good start, with GDP up 6.1% on an annual basis in the first quarter and employment growth coming in at 3.5%. On back of these developments, we have revised our forecasts up. The overarching narrative regarding the Irish economy remains one of an ongoing recovery in domestic demand, reflected in solid consumer spending and construction investment in particular. Export growth is also expected to continue, but is vulnerable to the unsettled external environment.
“Brexit is a key concern in this respect and – along with the policy agenda of the new US administration – has generated considerable uncertainty which is weighing most notably on business sentiment. Against this background, an eye to competitiveness and the general resilience of the economy will be important.
“Economic Pulse data show that sentiment has recovered some ground in the first half of 2017. While it is up from last year’s low point, the index remains below its pre-Brexit levels. The general air of uncertainty arising from the UK’s decision to leave the EU and the outcome of the US Presidential election is weighing on the Business Pulse in particular. However, the fact that two in three firms still have ambitions to expand their businesses in the next 1 to 3 years is a positive.”
Solid consumer spending
Consumer spending rose by 3.3% in 2016 and was up 1.8% on an annual basis in the first quarter of this year. A notable feature of the 2017 data has been some softening in new car sales, which were down 10.4% year-on-year in the first half of the year. Used car imports were up sharply over the same period however, with the weak pound going a long way to explaining this shifting pattern. Looking ahead, continuing employment growth, rising incomes and lower levels of debt are expected to underpin consumer spending, with weaker than expected inflation also providing a boost to households' purchasing power. On this basis, personal consumption growth of 3.2% is forecast for 2017 and 3.0% in 2018.
Investment picture mixed
Investment spending in 2016 was heavily influenced by developments in the intangibles category. The on-shoring of intellectual property especially, but also changes to aircraft leasing arrangements, help explain why investment grew by 61.2% last year. Some unwinding of these factors is likely over the coming years, which will weigh on headline growth. For the other components of investment, the picture for the first quarter of 2017 was more mixed. Construction activity rose by 26.8% year-on-year and further gains are expected over the forecast horizon on the back of strong residential and commercial demand. Core business investment was down in Q1 however. This accords well with Pulse research which finds that Brexit and Trump related uncertainty is taking its toll on investment decisions, with a number of firms putting their plans for this year on hold and adopting a ‘wait and see’ approach. That said, the growing domestic economy will provide support. In overall terms, investment is forecast to increase by 3.5% this year and 6.0% in 2018.
Services exports to the fore
Following growth of 4.6% last year, exports rose by 3.2% year-on-year in the first quarter of this year. Services led the way in Q1, with goods weighed down by weak contract manufacturing activity on the part of multinationals and lagging behind. Exporters continue to face a number of headwinds including adverse exchange rate movements and signs of slowing activity in the UK. More positively, the steady flow of export-orientated FDI and the growing US economy will provide support, as will the stronger momentum evident lately in the Euro area. Export growth of 4.8% - which is a bit higher than our previous forecasts - is projected for both 2017 and 2018. On the import side, reduced intellectual property imports are expected to dampen growth this year, with a pick up expected next year underpinned by solid domestic activity.
Robust jobs growth
Solid jobs gains have continued into 2017, with the first quarter data showing that employment rose by 3.5% year-on-year. There are now 2.06 million people in work, which is not far off the previous peak of 2.16 million. The resurgence of the domestic economy has been important in this respect, as sectors such as construction tend to be more labour intensive. Recent FDI announcements also look to have a high jobs content, which bodes well. And with economic activity stronger, we have revised up our employment growth forecasts to 3.0% for this year and 2.4% for next year. Unemployment remains on a downward trajectory and at 6.3% in June is at its lowest level since mid-2008. The rate is projected to be below 6% by the end of the year, and to head towards 5% by the end of next year.
Having registered zero growth in 2016, the CPI index has picked up slightly this year. It averaged 0.4% in the first six months as the impact of previous falls in oil prices and mortgage interest rate reductions started to wash out. The oil price recovery, albeit modest, in the early part of the year also shored up the headline rate, whereas the depreciation of the pound has had the opposite impact. Consumer price growth is expected to pick up moderately over the forecast horizon as spare capacity in the economy reduces further, and we are projecting CPI inflation of 0.5% in 2017 and 0.7% in 2018.