The economy will surge 6% this year and will keep growing rapidly next year too at a rate of 4.5%, while significant increases in domestic demand and for the first time in consumer spending will drive the recovery, the Economic and Social Research Institute said in its latest quarterly bulletin.
But the think tank said the forces that are driving the economy are already so powerful that the Government has no need to add to the fuel by cutting income or personal taxes in the budget next month.
The recovery is broad based and there is no reason to further pump up the economy. It forecast in June that the economy in terms of GDP would grow by 4.4% this year and next year by 3.7%.
In raising those projections, the ESRI says the recovery is both strong enough and sustainable for the Government to forego cutting personal or income taxes.
The ESRI details the reasons that the Irish economy is posting the fastest growth in eurozone. Exports are surging and now there are signs that consumers, despite the huge legacy issues of debt that continue to scar many households, are spending too.
It says that the growth that is emerging is sustainable through 2016.
Ireland’s recovery is outperforming the rest of the eurozone on both the GDP and GNP growth measures. Spain, also hit hard by the collapse of commercial and residential property markets during the crisis, records the second strongest economic recovery in the single currency area.
For Ireland, productivity growth numbers in 2014, this year and in 2016 will match progress recorded in the late 1990s, said the ESRI.
Unemployment, at 9.4% this month, will fall to 8% by the end of next year, the ESRI projects.
Meanwhile, consumer sentiment after the long years of recession is improving. “The most noticeable recent trend in the recovery is the increase observed in personal consumption,” said David Duffy, a co-author of the Autumn report.
The reasons are that more people in work means that consumers have more money to spend, even though “deleveraging”, or households paying down mortgage and personal debts, continues to hold back personal spending.
The ESRI says that following growth of 2% in 2014 that personal consumption will expand 2.8% this year and grow by 3% in 2016.
Exports are being boosted by expansion in the eurozone, the US and the UK – and by the weakness of the euro. Despite the risks of China’s slowdown and uncertainty surrounding the UK’s position in the EU, “continued domestic growth in the US and the UK indicate a positive outlook for Irish exports in 2015.”
Reviewing the policies enacted during the financial crisis, the ESRI said the eurozone’s prescriptions were found wanting.
Kieran McQuinn of the ESRI said Europe boosting growth, as the US did for its economy, from 2010 would have ameliorated some of the worst effects of the slump.
It cites as evidence the diverging paths of unemployment in the US and the eurozone, where rates were roughly similar in 2010, at around 10%.
Since then, US unemployment has fallen rapidly and the jobless rate there is now close to 5.5%. Eurozone policies sought to boost exports at a time when its trading partners were contracting. Eurozone unemployment rate rose from 2010 to peak at 12% and is now around 11% across the bloc, said Mr McQuinn.
In Ireland, only now are income per capita and income per worker above the pre-crisis levels.
Household debt levels have fallen, but debt as a proportion of disposable income, at 160%, remains high. Long-term mortgage arrears, meanwhile, are “the most difficult to resolve.”
Mr McQuinn concludes that the lessons for Ireland’s policy makers should be to encourage the building of an “effective” fiscal union in the eurozone.
“As a number of commentators have pointed out, the relentless pursuit of austerity at a time of contracting economic activity is not part of traditional mainstream policy thinking.”
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