Less exposed to UK but still worry

Ireland has the distinction of having been the EU28’s fastest growing economy in three of the past four years, writes Philip O’Sullivan.

The latest economic data suggest that this strength has continued into 2018.

High-frequency indicators such as the purchasing managers’ surveys in manufacturing, services, and the construction industries point to a sharp rate of expansion, though not quite at the blistering pace seen at the end of last year.

Tax receipts were 3% higher in the first two months of 2018, with this growth rate expected to quicken as the year progresses.

Unemployment continues to fall, standing at a nine-and-a-half year low of 6.1% in February, and the latest headline GDP figures imply the economy will expand by a remarkable 5.5% in 2018, keeping it in the top tier of the EU growth charts.

Employment remains a key source of good news. The manufacturing surveys suggest that labour market conditions should continue to tighten in 2018, which should push wages higher. Wages rose 2.5% at the end of 2017 from a year earlier.

Rising employment and wage growth should deliver another good year for many retailers. Headline retail sales are still, however, being weighed by the drop in the value of sterling, which has led to a drop in new car sales.

The most pressing issue in the country remains a chronic lack of housing.

The key message here remains that it will be a number of years before output can meet the flow of new demand.

To this end, we continue to foresee strong house price growth, probably around 8% in 2018. Rents will, unsurprisingly, rise by similar amounts, although rent caps in the key urban centres will see a slower growth in rents.

On trade, January saw record monthly goods exports of €12.3bn and the export component of the Services Purchasing Managers’ Index survey posted 15 successive months of expansion.

These indicators point to another good year for exports in 2018. However, unhelpful currency moves lead us to be somewhat conservative in our estimates.

The public finances are also unsurprisingly tapping the rising economy. We see a full-year general government surplus in 2018, the first that Ireland will have recorded since 2007.

General government debt could be below 60% by the end of the decade. And household debt has also fallen to its lowest level since late 2005.

As US president John F Kennedy said in 1962: “The time to repair the roof is when the sun is shining.”

And while the sun shines on Ireland, there are a number of risks. The Brexit negotiations are a key focus for Ireland.

While we have reduced our exposure to the UK. In 1926, remarkably, almost 97% of Irish goods exports went to Britain; it is now less than 13.5%.

Last year brought welcome reassurance, particularly in terms of trade on the island of Ireland, and beyond, although some of the detail remains to be worked out.

The 21-month transition period after March 2019 provides some welcome breathing space.

Other risks? More than 40% of Irish mortgages are on trackers with an average 1% spread over the ECB base rate.

However, while those borrowers are likely to see modest increases over the coming years, other borrowers could see their mortgage costs come down given where standard variable rate and fixed rates are here relative to elsewhere in the eurozone.

A greater concern for us is any adverse developments in the currency markets, while political developments in the US and eurozone also merit monitoring.

Philip O’Sullivan is chief economist at Investec Ireland.