Domestic threats to the economy can’t be ignored

Ireland’s economic performance has been excellent over recent years and prospects are good for 2018 despite problems such as the Brexit-related decline in the value of sterling. Confidence of consumers and businesses remains high, writes Tony Foley.

However, there are substantial medium-term risks on the international front and much will depend on the details of the Brexit deal, EU corporate tax changes, and US policy on tax and trade.

The memory and impact of our economic collapse is still so strong that we are inclined to think in terms of recently coming out of recession. In fact, 2017 is the fourth consecutive year of substantial economic growth — even allowing for the GDP measurement problems and the huge artificial growth in 2015 of 25.6%.

GDP volume growth was 8% in 2014, real economy growth was around 6% in 2015, growth was 5% in 2016, and 2017 growth will be around 4.5% to 5%. We are the best performing growth economy in the EU. The new, more appropriate, measure of Irish economic activity is ‘modified gross national income’ — in 2016, this was 69% of the more internationally used GDP figure.

The consumption growth indicator avoids measurement problems associated with GDP. Consumption declined in 2011, 2012, and 2013, but there was 2% growth in 2014, 4% growth in 2015, over 3% in 2016, and probably over 3% in 2017.

At present, prospects for 2018 are good despite sterling declining. Growth will be 3.5% to 4%. Average earnings will increase by about 3%. Employment will continue to increase to over 2.1m. The unemployment rate will drop to about 5.5% which is just about what would be defined as full-employment.

Beyond 2018, annual growth will be around 3% if the very serious international risk factors do not materialise. Brexit looms large. EU and US-generated changes in corporation tax rules may reduce our attractiveness as a location for multinationals.

We also have our domestic risk factors which would slow our economic growth, such as housing supply pressures, pressure on infrastructure from our previous growth, high expectations, political uncertainty, a concentrated industrial base, and competitiveness issues.

The 2018 budget will bring in a structural deficit of 0.5% of GDP, which is defined as balanced. Public debt as a percentage of GDP is declining but the level of debt remains high and much of the improvement in the debt ratio is because of the large increase in the value of GDP in recent years.

Our short-term economic outlook is good. The major risks and worries will not affect 2018 except for the exchange rate problem. If the big external risks, such as corporation tax and hard Brexit, arise, they will impact from 2019 onwards.

Our domestic economic management also matters greatly for our economic prospects. The task is to manage a full employment economy which will have reasonable, but lower than recently, economic growth. We will have to manage the capacity constraints associated with full employment. We will have to deal with our major infrastructural and services problems in what could be a difficult international environment.

Tony Foley is associate professor of economics at Dublin City University Business School