Economic Déjà Vu as Market Positivity Overshadows Ireland’s Vulnerability?
In the latest Friends First Economic Outlook report, “Irish Economic Growth – Opportunity and Risk Ahead”, published today, Friends First Chief Economist, Jim Power, has warned of the potential dangers of allowing Ireland’s strong economic growth to overshadow the need for rigorous risk assessment, in order to avoid repeating the political and economic pitfalls of the past. An over-reliance on a small number of large companies in the Irish corporate tax system, inflated GDP measurements and a chronic lack of housing were cited as key risk factors that create a serious vulnerability to Ireland’s economy. To compound matters, the Friends First report predicts that national average house prices look set to rise by at least 10% in 2019.
Economic Growth: Staying positive
According to the Friends First report, positive growth is now synchronised globally with the global economy in a relatively ‘sweet spot’. This strong global growth background has benefited the Irish economy with GDP expanding by 7.8% in 2017 or 3.9% net of the more nebulous activities of the multi-national sector. Total employment increased by 66,800 or 3.1% in the year to the final quarter of 2017 to reach 2.2 million, which was just 21,200 lower than peak employment in the third quarter of 2007. The report outlines how the economic outlook for 2018 and 2019 remains positive with Friends First forecasting growth of 5% in 2018, ahead of the Department of Finance’s expectations of 3.5%.
Global Corporation Tax and Company Concentration
According to the Friends First report, a greater focus on providing support to the indigenous economy is required. Due to the gathering momentum of the global corporate tax debate and increased attention on Ireland’s corporate tax structures, Ireland’s FDI model faces some level of threat. However, the report goes on to identify the real problem as being Ireland’s over dependence on a small number of very large multi-national companies for corporation tax receipts. Recent data from the Revenue Commissioners indicate that 37% of total corporate tax receipts are paid by the 10 largest companies operating in the economy. Any changes in internal or external circumstance could cause serious vulnerability for Ireland. Government tax revenues already fell modestly behind for Q1 2018 due to softer-than-expected income tax receipts (Source: Department of Finance Exchequer Returns).
The Housing Market
Housing is cited as being undoubtedly the biggest economic and social issue confronting Irish policy makers at the moment, and is likely to be for some time, even if barriers to increase supply were removed. One of the major issues identified for the economy over the short to medium term will be a shortage of labour in the construction sector. Without adequate labour supply, housing needs will not be met. Housing is a key element of national competitiveness, a fact that has been highlighted by recent CSO data. According to the report, housing now poses a serious national challenge and threat.
Commenting on the report, Jim Power, Chief Economist with Friends First said: “The pressure on Ireland’s corporate tax system; the inordinate economic and financial dependence on a small number of very large companies; the damage that the housing situation is doing to competitiveness; and the impact that inflated measures of GDP are having on the fiscal parameters are key risks and challenges that will need to be monitored and managed very carefully in 2018 and beyond. A proper risk assessment is required, and one which ignores political imperatives.”
SUMMARY OF APRIL 2018 OUTLOOK:
The Irish economy continues to experience a strong and broadly-based recovery. The economy has been helped significantly by the strengthening global economic cycle. This is of crucial importance to a small open economy where external trade is so important.
The Department of Finance budget-time growth forecast of 3.5% appears conservative. Real GDP should be capable of expanding by up to 5% in 2018. This growth should be driven by the following factors:
- The ongoing improvement in the global economy will prove supportive of the Irish export sector. The improvement in the Euro Zone should offset the weakness of the UK. Further sterling weakness could pose a threat to the indigenous export sector and visitor numbers from the UK, but sterling has stabilised in recent months and the downward momentum has been arrested for the moment at least. Brexit developments will be crucial to sterling’s pathway over the coming months;
- Consumer spending should be supported by employment growth of 2.9%; average wage growth of around 4%; a modest easing of the tax burden; and growth of around 6% in personal disposable incomes; and
- The investment performance in 2017 was distorted by multi-national transactions, but these should feed out of the system in 2018. Construction output should expand strongly and business investment expenditure should also expand quite strongly;
Concluding, Jim Power stated: “All in all, the indications for the coming year are positive. It is essential that national policy focuses very strongly on broadly-defined competitiveness. This includes wages and other business costs; IT infrastructure and capability; high quality public services; prudent management of the public finances; and the personal tax burden.”