Uncertain times ahead for the economy

While the international backdrop has become more unsettled, the Irish economy continues to exhibit signs of strong, broad-based growth.

Notably, consumer backdrop remains favourable. The economy is adding 1,000 jobs a week and unemployment has fallen to a post-crisis low of 5.6%.

Wage growth has accelerated to a post-crisis high of 4.1% year-on-year, nearly seven times the headline rate of increase in consumer prices.

Ireland’s exporters enjoyed a vintage 2018, with the tradesurplus reaching an all-time high of close to €1bn a week. The national accounts measure ofexports increased by 8.9% last year, with imports advancing by 7% on the same basis.

Recent downgrades to global growth, prolonged Brexit uncertainty and disruptions to trade flows cast a shadow over the outlook for export growth this year, however. Brexit is easily the most pressing of those issues, with a

A hard exit could having the potential to reduce long-run Irish economic output by up to 5% relative to baseline, as per recent ESRI analysis.

In the housing market, despite a quadrupling of output in the past five years, the most striking feature there is still a mismatch between supply and demand. We see this continuing to apply upward pressure on both house prices and rents, particularly outside of Dublin.

Asking prices in the capital are 46% above the national average, more than three times the differential in disposable incomes, so the Central Bank of Ireland’s macro-prudential rules arehaving a sharper effect there on Dublin’s housing market.

A mismatch between supply and demand is also evident in non-residential markets. Office take-up in Dublin was a record 3.9m million sq ft in 2018, while the underlying vacancy rate has fallen to just 5.6%, implying there is less than 3m sq ft of available space in the city.

While new builds will help to meet some occupier demand, we thinkregional markets are well-placed to benefit from Dublin’s limited availability.

The narrative is similar in the industrial market, where 2018 take-up in Dublin (3.3m sq ft) was the second-highest on record, influenced in part by supply chain relocations relating to Brexit.

In contrast to many otherdeveloped markets, bricks-and-mortar retail continues toperform solidly, likely due to the strong economic backdrop; theeffective absence of new build activity since the crash of a decade ago; and Ireland’s relatively low population density.

In contrast to the UK, the political backdrop here is looking strong and stable. In terms of public finances, the country lookslike it is on course for a second successive underlying fiscal surplus, while the headline debt / GDP ratio is on course to move below the key 60% level in the near future.

The recent drop in eurozone yields is a tailwind for the exchequer, with Ireland’s 10-year yield (0.59% at the time ofwriting) standing at less than a quarter of the weighted average interest rate on the national debt. This points to further helpful interest savings as expensive crisis-era borrowings are refinanced.

Speaking of the crisis, Considerable progress has been made in tidying up some of the legacies of the crisis. The last of the State-guaranteed liabilities in the banking sector rolled off in 2018; all of Nama’s government guaranteed senior debt has been redeemed; and system funding of the domestic banks has long returned to pre-crisis levels.

Unfortunately, there are still some effects from the crisis that have yet to be fully shaken off, most notably mortgage arrears which remain a challenge for the banking system, although this issue has been tempered by 22 quarters of improvement.

Largely reflecting the more uncertain external environment, we recently trimmed our 2019 headline GDP growth forecast by 20bps to a still impressive 4.3%. For 2020, we now see growth of 3.3%, versus 3.8% previously.

While these are slower rates of expansion than what we have seen in recent years, they are still comfortably above trend. In any event, a moderation is not unwelcome given how the combination of buoyant growth and diminishing ‘slack’ in the economy was starting to nibble away at Ireland’s competitiveness.