By Alan McQuaid
Last year was a good one for the world economy, with its best growth performance in six years.
However, some warning signs have started to emerge in the opening quarter of 2018. Equity prices experienced a sharp correction at the start of February amid concerns that underlying inflation was quickly mounting in the US, which could force the Federal Reserve to hike interest rates at a faster pace than previously expected.
While the crisis was mostly localised in stocks, with no big shockwaves in the foreign-exchange and interest-rate markets, the equity rout signals that volatility is back, after a long period of calm in the financial markets.
And now we have the threat of trade wars just as some analysts sense that the global recovery is near the top of its economic cycle.
There have been signs that global growth, recently revised up to 3.9% by the IMF for both 2018 and 2019, may be peaking or easing back. Overall, it looks like there are a number of indications of a slower pulse for global growth going forward, which makes the threat of protectionism all the more concerning, especially for such an open economy like Ireland.
However, we would like to see some second quarter data because first quarter numbers sometimes tend to be weak due to weather and holidays. Indeed, the ‘Beast from the East’ weather event clearly impacted negatively on economic activity in a number of countries last month, including Ireland.
Talking of Ireland, the GDP numbers for 2017 were very positive, even allowing for the distortions of intellectual property on the economy. Looking ahead to this year, GDP figures will continue to be impacted by the intellectual property issue and, indeed, aircraft leasing. We expect lower overall GDP growth in 2018 than last year’s 7.8%, but still a very healthy 5%-6%.
Brexit will have implications for Ireland, but as of now, the economy remains very resilient. The labour market continues to strengthen and the unemployment rate is set to drop below 6% in the coming months from the high of 15.9% hit in late 2011. However, youth unemployment remains too high.
The main concern remains the property market, with tentative signs that lack of supply could lead to over-heating and a repeat of what we saw during the height of the Celtic Tiger era.
Residential property prices are only going one way in the short-term until the supply issue is resolved. Housing has now overtaken health as the main political hot potato, and the key focus in Budget 2018 was on measures/initiatives that should help alleviate the problems going forward, but things won’t change overnight.
One can argue until the cows come home as to the merits of the proposals announced, but at least the Government has taken a step in the right direction, with an acknowledgement that something dramatic needs to be done — and sooner rather than later. But, as we wait for the measures to come through, prices will continue to rise.
We see house price growth staying in positive territory on a year-on-year basis for the foreseeable future, with the annual rate of increase now looking like it’s set to remain in double-digits for well into 2018 at least.
Brexit issues aside, the outlook for the Irish economy remains quite rosy in the short-term. However, an interesting — or, in many ways, startling — statistic is that Dublin accounts for around half of Ireland’s GDP. That is way out of line with other capital cities in the developed world. For example, London only contributes about a quarter to UK national output.
This is a serious problem. Dublin’s population, according to the most recent census was close on 1.4 million, two-and-a-half to three times bigger than the next major city — Cork. Unless there is a greater regional government spend compared to Dublin, the wealth gap between the capital and the rest of the country will only widen further in our view.
Alan McQuaid is chief economist with Merrion Capital