Rising pay expectations in the public and private sectors coupled with potentially damaging external developments are among the main threats to an otherwise healthy economy which is expected to top the EU growth charts again in 2015.
After a year of “spectacular” GDP growth set against the backdrop of a stagnating eurozone, Ireland is likely to again be the EU’s fastest growing economy this year with growth of 4% projected as opposed to the euro area average of 1%.
The country’s impressive recovery is increasingly driven by the domestic economy and an increase in investment, according to analysts at Goodbody Stockbrokers which finds that scepticism over the growth is misplaced.
Strong growth in taxes last year helped the deficit fall below 4% and Goodbody is predicting it to drop below 3% by the end of this year but warns spending pressures are becoming increasingly evident due to public sector pay talks and the upcoming general election.
Loosening the purse strings now and abandoning sensible fiscal policy will likely undo all the hard-earned progress achieved to date, analysts said.
“2014 was a year of deficit reduction, with impressive growth in tax revenues in particular pulling down the deficit to 3.9% of GDP, from 5.8%. The deficit should fall below 3% in 2015 but the Government has left itself little room for manoeuvre following the measures introduced in Budget 2015,” Goodbody economist, Dermot O’Leary said.
The “technical assumption” of no change in public sector pay post-2015 included in last October’s budget appears unrealistic given that the Haddington Road Agreement covers the period to July 2016 and with an election looming, the Government is likely to want a new agreement well in advance of April 2016 at which time the election must be held.
The access to, and cost of, credit also poses a risk to continued recovery but in the analysts’ view the primary risks to the economy are external with elections in Greece and Spain and a weak eurozone among the biggest concerns.
A flare-up of financial market tensions in the euro area, caused by political uncertainty or fear of deflation, would have knock-on implications for investment and spending here. The recovery in the economy coupled with a strengthening construction sector and strong investment growth are continuing to push Ireland ahead of its European neighbours in terms of growth.
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