External risks to Irish economy may be easing

Ireland may escape hits, but must remain vigilant

Ireland's economy has been boosted by the recovery in construction.

Ireland may escape hits, but must remain vigilantRevised forecasts published recently by the Economic and Social Research Institute (ESRI), Central Bank, and the Department of Finance have all seen growth projections upgraded for 2017 and 2018.

The Central Bank expects underlying domestic demand to grow by 4% this year and 3.5% in 2018. The ESRI and the Department of Finance are forecasting that GDP will grow by around 4% in 2017 and by just over 3.5% in 2018.

Meanwhile, the unemployment rate is expected to have fallen to close on 5% by the end of next year. Global growth has gained momentum in the past six months, which is obviously good news for a very open economy such as Ireland’s. In particular, the UK economy has performed much better than expected since the Brexit referendum vote last June. The eurozone economy also appears to be moving on to a much more solid growth path.

Meanwhile, sterling has recovered some lost ground against the euro and is back trading at around the 85p level compared to 90p last autumn. PMI surveys for the Irish manufacturing and services sectors picked up in the first quarter, consistent with the trend seen in other countries.

It is the strength of the domestic economy that is providing most encouragement to forecasters, with the recovery in construction activity gaining traction and continuing good growth in consumer spending. While there have been a couple of weak spots in the data published for the opening months of the year, the figures generally show that the economy is continuing to perform well.

There have been some concerns about the weakness of tax receipts in March. However, if one excludes corporation tax, which is hard to forecast and does not reflect underlying activity in the economy, then tax receipts were very close to target in the first quarter of the year.

Similarly, while new car sales fell in the first quarter, there was a sharp rise in imports of used cars from the UK. Thus, the total number of cars licenced in the first quarter actually rose from the already high levels recorded a year earlier.

Meanwhile, retail sales excluding the motor trade, have had a very strong start to the year, rising by 1.7% in January and a further 1.1% in February, to leave them 6% higher on a year-on-year basis.

The labour market continues to improve, with a further marked fall of 10,000 in jobless numbers in the opening three months of the year. The unemployment rate fell to 6.4% in March, down from 6.9% at the end of 2016 and 8.3% a year earlier. Improving labour market conditions helped boost consumer confidence in the opening months of 2017, as it rose to near 15-year highs. All the signs are that the recovery in construction activity is gaining momentum.

Both housing starts and completions rose strongly at the start of 2017, while mortgage approvals were up by over 50% in the three months to February from year earlier levels. It is little wonder, then, that growth forecasts for the Irish economy are being upgraded. The risks for the economy, though, remain tilted to the downside. These mainly relate to Brexit and possible policy changes in the US.

However, the far more constructive tone to recent commentary on Brexit — from both the UK and EU sides — suggests a deal could be reached that averts most of the downside risks arising from the UK’s EU exit. Meanwhile, the new administration in the US is finding out that policy changes are not easy to do, and also appears to be reverting back more towards the status quo. Thus, the main risks facing the Irish economy may not materialise to any great extent, but they will still require careful watching.

Oliver Mangan is chief economist at AIB


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