OLIVER MANGAN: Risks remain despite upturn

The past month has seen updated forecasts published on the Irish economy by the ESRI, Central Bank and Department of Finance.

The past month has seen updated forecasts published on the Irish economy by the ESRI, Central Bank and Department of Finance.

All three have upgraded their outlook on the economy for the next two years.

Three factors underpin the improved outlook: a generally more favourable external environment, growing expectations of a soft Brexit by the UK in March 2019 and continuing strong data on the Irish economy in recent months.

On the external front, the IMF is forecasting good growth of 3.9% for the world economy in 2018 and 2019. Meantime, hopes have risen of a soft Brexit next year, following the agreement on a transition period to last until the end of 2020 that should largely maintain the existing trading arrangements between the EU and UK.

On the domestic front, the indicators released in the opening months of this year are consistent with a continuing strong growth performance by the economy.

The Purchasing Managers Indices (PMIs) for the manufacturing, services and construction sectors, which are viewed as good leading indicators of activity, remained at high levels.

There was some softening in the March indices owing to bad weather, but this should reverse this month.

Meanwhile, consumer confidence picked up to its highest level since 2001 in the opening months of the year. Retail sales remain strong.

The improvement in the labour market is being sustained, with the unemployment rate dropping to 6.1%. House building activity continues to recover, with both commencements and completions rising further in January and February.

Tax revenues are more or less on target, growing by 3.5%.

The Central Bank has estimated the real underlying growth rate of the economy was “in the region of 5%” in 2017. Growth is expected to show just a slight deceleration in 2018, with both the Central Bank and ESRI forecasting the economy will expand by 4.8% this year.

Growth is expected to moderate somewhat further in 2019, with the Central Bank, ESRI, Department of Finance and AIB all forecasting GDP will rise at a still strong rate of around 4%.

Furthermore, growth is expected to remain broad based. But there are risks too, notably from a changing global tax environment and increasing trade protectionism, while a hard Brexit cannot be ruled out.

Oliver Mangan is chief economist at AIB


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