EU sees rents helping to drive services inflation

Irish rents and restaurant service prices are likely to continue to drive the prices of services higher, the EU said in new forecasts that suggest that the economy will continue to grow as long as external risks such as a crash-out Brexit are avoided.

EU sees rents helping to drive services inflation

Irish rents and restaurant service prices are likely to continue to drive the prices of services higher, the EU said in new forecasts that suggest that the economy will continue to grow as long as external risks such as a crash-out Brexit are avoided.

The commission projects that a measure of economic growth — modified domestic demand that excludes the distortions of the multinationals on the national accounts — will grow by an average 3% through 2021.

And it projects that a measure of price inflation will rise by only 1.1% next year and 1.4% in 2021, as wages rise, but that “rents and restaurant service prices are expected to sustain services price inflation”.

New CSO figures showed that while the Consumer Price Index rose only 0.7% in October since October 2018, that private landlord and local authority rents climbed by over 5% in the same period.

The EU also said that it expects migration will continue to help offset skills shortages “as skills and labour shortages are building up”.

In a generally upbeat assessment, the EU, however, reiterates the external risks that could yet rock the Irish economy, including Brexit; changes in global taxation rules that could potentially damage the Government’s low-tax lure for multinationals; and, overall, the risks entailed by the “difficult-to-predict activities of multinationals”.

“On the domestic side, the tight labour market and diminishing spare capacity point to an economy possibly operating above its potential. Against this background, signs of overheating could become more apparent if adverse external shocks do not materialise,” the commission adds.

Other CSO figures suggest that the foreign-owned multinationals are gaining ever greater economic significance in the Irish economy, with their share of so-called gross value added, or GVA, rising to 42.4% last year.

In its quarterly reports for other EU countries, the commission suggests that the eurozone will restrain spending under draft budget plans submitted by the governments, despite calls to counter a worsening economic slowdown.

The commission said Germany, the largest economy in the 19-country eurozone, would keep a budget surplus at least until 2021, although the surplus would narrow.

High-debt countries would keep spending, despite recommendations for thriftiness.

France’s deficit would be above the EU ceiling this year and Italy’s debt would grow to nearly 140% of output, the commission predicted.

Despite a worsening growth outlook, Germany is set to maintain a large budget surplus this year at 1.2% of its GDP. The surplus will narrow to 0.6% of GDP next year, and 0.2% in 2021, the commission forecast.

The Netherlands, another eurozone state that could spend more, is set for a surplus of 1.5% of output this year, 0.5% next and 0.4% in 2021. EU economics commissioner Pierre Moscovici praised the reduction of budget surpluses but said more could be done.

With economies weakening, he said it was probably time to change tack in the bloc’s fiscal policy, which has so far focused on cutting deficits instead of boosting growth. “When it starts to get cold, it is perhaps the moment to turn up the heating,” Mr Moscovici told a news conference.

Additional reporting Reuters

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