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The Economic Outlook report from Friends First Chief Economist, Jim Power, has been published today. This shows that the strong and broad-based Irish Economic recovery in 2015 has continued its momentum so far in 2016, with growth still very positive. However, there are some tentative signs that growth is easing somewhat. Brexit uncertainty and currency movements are the key contributing factors.
Brexit and its short and long term impacts are of considerable concern for Ireland. In the short-term, the key issues include a slowdown in the UK economy and a further weakening of sterling. It is difficult to identify any real economic upside from an actual Brexit for the UK, Ireland or the EU in general.
“Given all of the unknowns, it is very difficult to be too prescriptive as to what to expect at this juncture. Uncertainty will be the byword for the foreseeable future. If the UK does decide to proceed with Article 50, it is not clear what sort of relationship will be negotiated with the EU, but it is clear that if the UK wants access to the EU market, which presumably it will, it would still be bound by many of the regulations and financial commitments that it is in theory trying to break free from. However, Ireland could benefit on the FDI front.” Jim Power commented.
GDP growth of around 4.3% looks achievable in 2016. The impact of positive external factors has been very important to Ireland’s strong recovery over the past couple of years. These are : declining oil prices, low interest rates, strength of the euro, positive US and UK economic growth. However, all four are outside of our control, and cannot be taken for granted. Two have deteriorated considerably in recent months– sterling has lost 24% of its value against the euro and the UK economy is under Brexit-induced pressure.
Housing was clearly identified as an issue of extreme concern in General Election 2016, and has been afforded significant priority in subsequent months. The lending regulations introduced by the Central Bank in February 2015 have clearly had an impact, stopping price increases, in particular on the Dublin market but basic issues of affordability are also likely to be having an impact, as incomes are not growing at a sufficient pace to justify the growth in prices seen during 2014. This is particularly true in Dublin. The mortgage arrears situation is improving, it remains a significant challenge for mortgage providers and mortgage holders.
“As regards the housing market and the challenges that presents, it is difficult to argue with anything in the Action Plan for Housing and Homelessness, but the political challenge is to make sure that the Plan is delivered in full. A supply response is the way forward. Giving first-time buyers tax breaks would not work, and the Central Bank lending regulations should not be amended. If more money is given to prospective buyers, they will just pay a higher price and exacerbate the upward pressure on house prices.” Mr Power states. While the prospects for Ireland in 2016 and beyond still look positive, it would be naïve and dangerous to become complacent. It is important that fiscal policy and all issues around competitiveness are managed as prudently as possible to ensure that the economy is as resilient as possible in the event of some external shock.
In June 2016, the Government published the Summer Economic Statement which amongst other things laid out the projected economic environment over the period out to 2021, and more importantly it sets out the projected fiscal position over that period. GDP growth is forecast to average 3.7% per annum between 2016 and 2021. This looks realistic based on what we know at the moment. The Government also specified what the fiscal space is likely to be over the coming years.
Obviously the scope for using the ‘fiscal space’ will be determined by the macro-economic performance and if this veers off track, the fiscal space will have to be adjusted accordingly. Brexit could also have a negative impact on the available fiscal resources. However, at this time all indicators of real economic activity are continuing to suggest an improving Irish economy.