HIGHLIGHTS
- For full year 2016, GDP expansion by 4.2% and GNP expansion by 7.5% likely
- Global economy is growing but below potential
- Key risks to global and Irish economy in 2017 are political
- Housing is one of the key economic and social challenges facing Ireland
The Irish economy is performing strongly in 2016, with all indicators of economic activity expanding at a solid pace, according to Jim Power’s Economic Outlook for Friends First (pdf). There has been some easing in activity since the beginning of the summer. This is evidenced in retail sales, car sales, exports to the UK and tax revenues. Sterling weakness and the uncertainty brought on by Brexit and the US election result are having an impact. Looking ahead to 2017, there are immense risks to the Irish economic outlook including:
- Brexit
- The policies of President Trump
- Weak domestic political leadership
- Growing wage pressures in the public sector
At the launch of Friends First Economic Outlook Report, December 2016, Jim Power, Chief Economist with Brian O’Neill, Strategic Marketing Director
Commenting on the outlook, Jim Power, Chief Economist with Friends First, stated “Ireland cannot allow the cost competitiveness of the economy and the fiscal situation be undermined at a time when the recovery is facing immense challenges, not least from Brexit. The global rejection of conventional politics is becoming a bigger and bigger threat to the global economy and political stability.” Presidential elections in Austria and France, and general elections in Germany and the Netherlands have the potential to cause significant difficulties for the stability of the EU.
In the period since the UK electorate voted to leave the EU, the political situation has been very volatile. Sterling weakness has been the immediate impact of the Brexit vote, but the longer-term issue of concern is the trading relationship that the UK will have with the EU post-Brexit. The most obvious challenges that are presented to Ireland are for indigenous Irish exporters and tourism. Cross-border shopping is an immediate issue of concern. The main opportunity for Ireland would be through UK companies either re-locating or setting up branches in Ireland. However, housing, public services and the onerous personal tax burden all pose threats to those opportunities.
The election of Donald Trump as President of the United States has generated enormous uncertainty and nobody really knows what to expect. The economic issues that he campaigned on included immigration, free trade agreements, tax cuts and investment in infrastructure and defence spending. However, the market reaction to his victory has been quite relaxed. The dollar has strengthened; bond yields and equity markets have increased due to a belief that he will reflate the economy, which in turn would prompt the Federal Reserve to tighten monetary policy. Market volatility is likely to be a prominent feature of the landscape over the coming months.
However, despite all of this uncertainty, the Irish economy is continuing to perform well with consumer spending remaining solid and an improving labour market. Consumer confidence has softened in recent months and in October reached the lowest level in 20 months. On the housing front there is strong pent-up demand coming back in to the market. This is being driven by the solid economic and demographic developments. Supply is an issue with the level of house building remaining very low. The Action Plan for Housing has now been published and sets ambitious targets for residential construction while making the best use of the existing housing stock and laying the foundations for a more vibrant and responsive private rented sector.
The Government’s plans to introduce a package for first-time buyers and the Central Bank’s relaxtion of lending rules are not prudent and threaten to generate house price inflation. Addressing the supply side would be much more prudent. Such measures could include a reduction in the VAT rate for the construction sector; a relaxation of development levies, and a speeding up of the planning process.
“The outlook for the Irish economy is shaping up to be positive for 2017 with all indicators suggesting that economic activity will continue expanding at a reasonable pace. However, we have to acknowledge the immense uncertainty given the range of external factors in operation. The global issues of Brexit and the election of Trump who takes the reins in January are open to many interpretations and only time will tell the actual nature of their impact.” Power continued.