Economic Backdrop to Budget 2018
The economic background against which Budget 2018 was presented is positive. The global economy continues to expand and most domestic economic indicators are continuing to suggest solid growth in the economy.
We only have detailed national accounts data for the first half of the year. Despite the distortions created by the multi-national sector, the underlying picture is good. In the first 6 months, gross domestic product (GDP) expanded 5.5% and gross national product (GNP) expanded by 2.6%. Consumer spending on goods and services increased by 1.7%; investment expanded by 3.1%; exports of goods & services expanded by 3.2%; and imports of goods & services declined by 1.9%.
The following is a synopsis of the most up to date data:
- In the first 8 months of the year, the value of retail sales increased by 1% and volume of sales increased by 3.3%. However, weak new car sales have distorted these figures. When car sales are excluded, the value of retail sales increased by 3.6% and the volume of sales by 6.6%. The persistent gap between the value and volume metrics is indicative of a consumer sector that is still resistant to higher prices, but the trend in retail spending continues to improve;
- New car sales declined by just over 10% in the first 9 months of the year. Sterling weakness and high motor-related taxes are leading to a surge in imports of second hand cars from the UK, and these imports are undermining new car sales;
- The labour market is performing very strongly. Employment increased by 48,100 or 2.4% in the year to the end of June 2017. Employment in the second quarter stood at 2.063 million. The sectoral breakdown of employment growth is strong. The overall increase in employment was made up of a very strong increase of 77,800 or 5% in full-time employment and a decline of 29,700 (-6.7%) in part-time employment. The latter changes are really indicative of the strength of the overall labour market and the improving confidence of the business community;
- The unemployment rate stood at 6.1% of the labour force in September, down from 15.2% in 2012. The seasonally adjusted number of people unemployed stood at 133,200 in August and has declined by 63,600 over the past two years;
- The export sector of the economy is performing strongly. In the first seven months of the year, the value of merchandise exports was 6.7% ahead of the same period in 2016. Exports of food and live animals increased by 15.9%. Somewhat surprisingly given the weakness of sterling, exports to the UK increased by 12.6%. It is probably the case that Irish exporters to the UK are using price to maintain competitiveness in the face of very adverse exchange rate movements. This would have negative implications for business margins and would not be a sustainable situation for business in the longer-run;
- The tourism performance continues to be very strong. In the first eight months of the year, the number of overseas visitors to Ireland was 2.5% ahead of the same period in 2016. However, visitor numbers from Great Britain were 7.1% lower. Visitors from Great Britain accounted for 37% of total overseas visitors to Ireland in the first eight months of 2017. This is down from 41% in 2016. Sterling weakness is pressurising this market; and
- Consumer confidence was at an 18-month high in September.
Budget 2018 – The Economic and Financial Assumptions
The success or failure of any budget in terms of its fiscal targets is heavily dependent on how the real economy performs.
Table 1 provides a summary of the economic outlook according to the Department of Finance following the changes announced in Budget 2018.
GDP growth is expected to average 3.5% per annum between 2017 and 2020.
Table 1: Economic Forecast