ECB to keep rates very low for a couple of years

Official national accounts data published by the CSO show that the economy had a very strong first half to the year. The underlying growth rate of the domestic economy is put at over 6% for the period, with strong rises in consumer spending, business investment and construction output.

Meanwhile, employment rose by over 3%, year-on-year, in the first half of 2018. Data from a range of indicators are now becoming available for the third quarter of the year and show continuing robust growth by the economy.

Retail sales, excluding the motor trade, rose by 1.3% in the quarter for a year-on-year gain of 4.3%. Housing completions rose by 23.5% compared with the same period last year.

Exchequer returns show continued solid growth in tax receipts in the three months to September.

The clearest evidence of continuing robust activity is provided by labour force data for the third quarter published by the CSO last week.

These show that employment rose by 3% from a year earlier, while the unemployment rate has dropped to 5.5%, its lowest level in over a decade. The long-term unemployment rate has fallen to just above 2%.

Employment gains are broad-based, with particularly large increases in construction, information technology, the hospitality sector, support services, education and public administration.

With unemployment falling to low levels, inward migration is becoming an important source of labour supply. About 40% of the rise in employment in the past year was accounted for by foreigners, who now make up 16.5% of the workforce.

Thus, the economy has entered the final quarter of the year in robust shape. Virtually all forecasts are for continuing strong Irish growth over the next couple of years. A number of positive growth factors are at work. The ECB has indicated that interest rates will remain very low over the next couple of years.

Meanwhile, with the budget deficit eliminated, government spending is now on the rise. The recovery in the construction sector has much further to run as house building recovers from still very low levels of output and public infrastructure spending gets ramped up.

Strong growth in household income is expected on further good employment gains and accelerating wage inflation. It is anticipated that inflows of foreign direct investment will remain strong, helped by Brexit.

However, some dark clouds are gathering on the external front in terms of the outlook for the world economy in 2019.

There are growing concerns that there could be a significant deceleration in the pace of global growth next year.

The difficulties which have beset some large emerging economies this year could be a precursor to a more broad-based slowdown in activity in 2019.

Growth has already slowed in Europe and Japan this year, while there have been signs in some recent data that the pace of activity may have peaked in the US.

Brexit also remains a major risk for the Irish economy next year.

Concerns about global growth prospects have been a key factor behind the marked weakening of global stock markets over the past two months.

The general expectation remains for solid global growth next year, but the risks are now very much to the downside.

Ireland, as a very open economy, will need to keep a close eye on external developments in 2019.

Oliver Mangan is chief economist at AIB

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