Coming into 2019, apart from the obvious issue of Brexit, which remains unresolved, the biggest challenge to the small, open Irish economy was undoubtedly the grey clouds that were gathering over the global economy.
The second-half of 2018 saw a sharp slowdown in many of the world’s major economic regions, with the eurozone the most obvious area of vulnerability.
Even in the US, which got a strong boost last year from its president, Donald Trump’s tax cuts, growth was starting to soften towards the end of the year.
Official agencies, such as the IMF and the Organisation for Economic Co-Operation and Development (OECD), have provided reasonably downbeat assessments of global growth prospects this year.
And the mood at the annual economic bash in Davos, at the end of January, was more downbeat than for some time.
All of these developments set a sombre backdrop for Irish policymakers and suggested that caution in the management of the Irish economy and its public finances was warranted.
The big fear is that the boost to corporate tax revenues last year — a record €10.4bn was collected from this source — would set the stage for a significant relaxation of government expenditure in the run-up to local and European elections. A general election could come at any moment. Such a strategy would be dangerous, in the event of global economic momentum going awry.
Over the past week, we have received some of the early, official growth data for the first quarter, and the picture is somewhat brighter than was expected.
In the US, GDP showed annualised growth of 3.2%, which was well ahead of expectations.
However, the consensus is that growth was boosted by a number of one-off factors, whose impact would dissipate over the coming months.
I am not sure why forecasters were not aware of these factors, but it is not unusual for forecasters to come up with reasons why they were hopelessly wrong.
The moral of the story is that economic forecasting is not a science and should be treated with the utmost caution. In the eurozone, GDP expanded by a much stronger-than-expected 0.4% during the first quarter.
On a year-on-year basis, this translates to a growth rate of 1.2%.
While this annual growth rate is not great and is the lowest since the second quarter of 2014, it is still slightly better than expected and at least the downward momentum has been arrested for the moment.
In addition, the unemployment rate in the eurozone declined to 7.7%, which is the lowest rate since September 2008.
A note of caution is warranted: unemployment stands at 18.5% in Greece, 14% in Spain, and 10.2% in Italy. Incidentally, Ireland’s rate stood at a pretty impressive 5.4% in April.
In summary, the eurozone is, thankfully, still showing some growth momentum.
All in all, we can be slightly more relaxed about the global economic background than in recent months, which is good news for Ireland.
The stronger-than-expected growth out-turn in the US and the eurozone does not change the outlook for interest rates.
US rates are not likely to rise any further in this cycle.
In the eurozone, headline inflation, at 1.4%, is still well below the ECB official target of 2%.
Despite the declining unemployment rate, inflationary pressures remain very subdued and the ECB is likely to remain very relaxed for the foreseeable future.
Getting back to the need for fiscal caution and prudence in the management of the Irish public finances, the tax conference held by the Department of Finance, in Dublin, this week, suggests that international corporation tax changes could cost the Irish exchequer €2bn to €3bn in annual revenues over the coming years.
The moral of the story is that the Irish government must not base its expenditure plans on tax revenues that may well turn out to be transitory. We made that mistake before.