Economy still has ample scope to pleasantly surprise

The past number of years have seen a strong recovery by the Irish economy that has surpassed all expectations, writes Oliver Mangan.

This has been led by robust export growth but there has also been a strong rebound in domestic demand, including business investment, construction and consumer spending.

The latest National Accounts data show that the economy grew by 5.5% year-on- year in the first half of 2017.

However, owing to base effects, annual GDP growth is likely to slow sharply in the second half of the year — GDP rose by 2.2% and 5.8% on a quarterly basis in the final two quarters of 2016, which is unlikely to be repeated this year.

Hence, GDP growth is forecast to average around 4.5% for 2017 as a whole, down from 5.1% in 2016.

Exports have maintained their strong uptrend in 2017, with service exports rising by 15% in the first half of the year. However, there has been a significant slowdown in the rate of growth in domestic demand.

Growth in core domestic spending — consumer and government spending plus core investment (excluding aircraft and intangibles) — slowed to 2.7% in the opening half of 2017 from an average rate of 4.8% over the previous three years.

Construction has continued to grow strongly, rising by over 20% in the first half of 2017. However, core business investment has fallen back somewhat, having doubled in the previous four years.

After the deep recession, there may have been an element of ‘catch-up’ to the strong growth in business investment in recent years, which is proving difficult to sustain in 2017.

Meanwhile, consumer spending rose by 1.75% in the opening half of the year, well below the strong growth rates of 4.2% and 3.3% seen in 2015 and 2016, respectively.

Core retail sales (excluding the motor trade) have maintained their robust growth rate, rising by 6.5% in the first half of 2017.

However, there has been a marked slowdown in the growth rate of car sales (new and second-hand imports) this year, as these have returned to relatively high levels.

Meanwhile, spending on services has been particularly sluggish, rising by just 1.2% in the first half of the year.

The weakness of consumer spending is at odds with the strong rise in employment, pick-up in wage growth and near zero rate of consumer price inflation evident this year. Thus, we would not be surprised to see the consumer spending figures revised upwards, especially for services.

Labour market data have remained strong this year, with employment up by 3% in the first half.

Meanwhile, the unemployment rate had declined to 6.1% by August from 6.9% at the end of 2016. Overall, despite the weakening of growth in domestic demand, the economy has continued to perform well this year. GDP growth is now being widely forecast at around 4.5% for 2017, keeping Ireland as one of the fastest growing economies in Europe.

Most forecasters see GDP growth slowing to around 3.5% next year, with the uncertainty around Brexit, a slowdown in UK economic activity and the rise of the euro, especially against sterling, all seen as headwinds.

However, Irish economic growth has tended to surprise on the upside in recent years.

The strengthening of global activity, continuing very low interest rate environment as well as rising real incomes and employment point to the scope for Irish growth to surprise on the upside again next year.

Indeed, if agreement can be reached on a soft UK Brexit, it certainly would lessen the impact of one of the main risks facing the Irish economy over the next couple of years.

  • Oliver Mangan is chief economist at AIB

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