Recently Jim Power, Chief Economist with Aviva Ireland, reviewed the positive growth of the Irish economy in 2019 and the challenges we face both domestically and globally for 2020.
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,but the more uncertain external backdrop and Brexit represent two significant threats.
Domestically, the challenges are quite clear.
- housing with demand currently outstripping supply;
- 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 all employers and will act as a constraint on economic growth;
- the personal sector will remain pressurised due to a combination of the high personal tax burden; subdued wage growth for the past decade, although wages will rise more strongly in 2019;
- rising house prices and rents will continue to soak up household disposable income;and
- Brexit will remain a source of deep concern and uncertainty.
The external risk factors and challenges are also very clear. Boris Johnson has become the Prime Minister,with a strong mandate from within his party to push ahead with Brexit on October 31st. The Cabinet he has chosen is very much pro-Brexit. There can be no certainty about prospects for a ‘disorderly’ Brexit, but the risks have certainly heightened. A further delay cannot be ruled out,but looks less likely at this juncture.
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;and 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 challenges,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.
There is not a lot Ireland can do to influence the global threats and challenges,but it is imperative that a prudent approach is taken to the management of the public finances; that competitiveness, particularly the costs of doing business, is managed very carefully; that housing supply is increased; and that the current historically low long-term interest rate environment is exploited to deliver effective and efficient capital investment.
Real GDP growth is forecast to expand by around 4.5 per cent in 2019. Slower growth of 2 per cent 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 the 8 October. It will be very challenging. On the one hand the economy is showing some 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 per cent at the end of 2018, the level when measures in terms of the more realistic modified measure (GNI*) stood at 105 per cent. The bottom line is that Ireland still has a dangerously high level of debt and this should limit the scope for fiscal expansion.