As the year approaches its end, it is probably fair to say that it has been one of mixed emotions as regards the performances of the economy and Ireland’s top companies, writes Alan McQuaid
The dominant theme of the year has been Brexit and two-and-a-half years after the referendum result, we are still none the wiser as regards under what exact terms our closest neighbour will leave the bloc.
The uncertainty over Brexit has hit Irish companies badly, with the ISEQ, one of the worst performing stockmarkets this year. There is little doubt that equity investors are worried that if the UK could leave the EU with no deal or a hard Brexit and that in theory at least would hit Ireland harder than most.
Yet in contrast, government bond investors don’t seem unduly worried.
Yes, Irish fixed-income has underperformed many of its eurozone peers in recent weeks, yet the yield or interest rate on benchmark 10-year debt remains less than 1%, hardly a sign of undue worry as to how Brexit will play out for the Irish sovereign.
History shows that the bond market tends to have a better track record than its equity market counterpart in calling how things will pan out on the economic front. And if the bond
market is right again this time, then there is a lot of value to be had in Irish shares.
Indeed, Ireland’s economic performance has again been very strong in 2018. Growth in the first three-quarters of the year was up 7.5% in real terms on the same period last year, leaving it on course to top the EU growth league table for the fifth year running. Headline growth continues to be distorted by the impact of intellectual property/aircraft leasing, but even stripping this out, it looks like the economy will see growth of around 4.5% this year.
The most important indicator as far as the health of the economy is concerned is the level of employment, and the numbers at work hit a new record level in the third quarter. The jobless rate was 5.3% in November, and was the lowest since February 2008 and an almost 11% point improvement from the peak of 16% hit in January/February 2012 during the height of the financial crisis.
Furthermore, Ireland’s jobless rate is close on 3% below the eurozone average of 8.1%.
The budgetary position also continues to improve. Boosted by higher-than-expected corporate tax receipts, the exchequer is likely to be very close to balance in 2018, again a
remarkable achievement given that Ireland had effectively been written off during the very difficult years of the financial crisis.
Still, there are a lot of issues that need to be addressed, particularly in relation to women in the workforce, lack of wage growth and the over-dependence on Dublin as the growth engine of the economy.
The ECB is still talking about starting the ‘normalisation’ process in 2019, but it is likely to be 2020 at the earliest before it raises rates. In fact, as things stand, ECB president Mario Draghi is set to depart office on October 31, 2019, without having overseen a rate rise in his eight-year term in office.
The cost and availability of housing remains a big problem. Rent continues to go through the roof. First-time housebuyers continue to be priced out of the market. Subsidising purchasers through tax breaks is not the answer. At least new supply is coming on stream, though still not sufficient at this stage to meet overall demand.
Based on the latest official CSO data, 18,500 new dwellings completed is forecast for 2018, rising up to 23,000 in 2019. So it is a case of trying to be patient. However, as we wait for more houses to be built, residential property prices will continue to rise, although anecdotal evidence suggests house price growth may have started to ease, especially in Dublin.
Still, house-price growth is likely to stay in positive territory on a year-on-year basis for the immediate future. The biggest rise this year is likely to come from outside the capital, with the asking price for houses in more expensive areas rising at a slower rate.
As we head into 2019, there is a lot of uncertainty hanging over the economy because of Brexit. However, as the ESRI said in its most recent Quarterly Economic Commentary, even in a worst-case hard-Brexit scenario, the Irish economy should still expand by 2% next year, a lot lower than what we have been used to in recent years, but still higher than what the key
eurozone economies of Germany, France and Italy are likely to do.
At a domestic political level, extension of the confidence-and-supply arrangement between Fine Gael and Fianna Fáil and securing EU backing for resistance to a hard border could both be considered as economic wins, as it reduces uncertainty for businesses.
So while difficult challenges lie ahead, there is no reason why Ireland can’t, with careful stewardship and navigation, weather the Brexit storm.
* Alan McQuaid is an economist at Cantor Fitzgerald Ireland