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Mid-year economic review 2019

Risk of a disorderly Brexit continues to cast a shadow on growth forecasting for Irish economy, according to Aviva Ireland’s Chief Economist

“The momentum in the Irish economy so far in 2019 has been positive and looks likely to be sustained over the remainder of the year.  However, the more uncertain external backdrop and Brexit represent two significant threats”, according to Aviva Ireland’s Chief Economist, Jim Power today, Friday 12 July 2019.

“The export side of the economy is continuing to perform very impressively, with both the multi-national and indigenous components doing well; the inward tourism numbers continue to expand; tax revenues are still displaying a reasonable level of buoyancy; and perhaps most impressively of all, the labour market is continuing to perform very strongly.

“Domestically the challenges are quite clear.  These include the provision of housing and the pressure to increase expenditure on public services; particularly health.  As the economy steadily moves towards full employment, wage pressures are likely to intensify, and the recruitment and retention of workers will become an increasingly significant challenge for employers and will act as a constraint on economic growth.  The private sector will in turn remain pressurised due to a combination of high personal tax and subdued wage growth over the past decade.   Although wages will rise more strongly this year, rising house prices and rents will continue to soak up household disposable income.  Brexit will remain a source of deep concern and uncertainty.

“The external risk factors and challenges are also very clear.  Boris Johnson looks likely to be the next leader of the Tory party and Prime Minister.  If he wins the leadership contest, it will most likely be due to the support of the European Research Group (ERG), led by Jacob Rees-Mogg.  This suggests that he will be under pressure to go for a ‘no-deal’ Brexit at the end of October.  Whilst there can be no certainty about this, the risk of a ‘disorderly’ Brexit has certainly increased, and a further delay cannot be ruled out.  The global economic outlook is under some pressure as global momentum is waning and the protectionist stance of President Trump poses a significant threat to the well-being of the global economy.  In addition, the pressure to reform global corporation tax structures is intensifying and looks inevitable in the longer-term, which will pressurise Ireland’s very successful FDI model.

“In the face of these challenged, it seems inevitable that Irish growth will be slower in 2020.  It is very difficult to model for Brexit, but a disorderly Brexit would have a significant impact on consumer and business confidence and real economic activity.  Real GDP growth is forecast to expand by around 4.5% in 2019.  Slower growth of 2% looks realistic for 2020, but this will be almost totally dictated by a very uncertain Brexit outcome.  The Irish economy is currently in a very uncertain set of circumstances and very careful management will be required to control that which is within our control.

“Budget 2020 will be presented on 8 October and it will be very challenging.  This will likely be the last budget of the current Dail.  However, the Government are quite unlikely to deliver a package of significant expenditure cuts and tax reduction given the uncertainties that currently prevail.

“On the one hand the economy is showing signs of overheating, but on the other hand it is facing immense domestic and external challenges, particularly Brexit.  The fiscal parameters are still tight and the ability to satisfy all demands is not strong.  Tough choices will have to be made.  While Ireland’s government debt measured as a percentage of GDP fell to 64.8% at the end of 2018, the level when measured in terms of the more realistic modified measure (GNI) stood at 105%.  The bottom line is that Ireland still has a dangerous high level of debt and this should limit the scope for fiscal expansion,” concluded Jim Power.

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