Economy primed for sustained growth, says Goldman Sachs

The decline in the euro’s exchange rate is particularly beneficial to Ireland, and the Irish economy has the capacity to continue to grow rapidly without overheating, according to the senior European economist with Goldman Sachs.

London-based Kevin Daly said that political factors were now the main risk to Ireland’s economic future, citing the increased popularity of Sinn Féin which, he said, had policies that were similar to those of Syriza in Greece and Podemos in Spain.

Earlier this year Davy and a number of bond market participants who spoke to The Irish Times raised similar concerns about political risks to the economy.

Because of its unusually open economy and its trade with non-euro area export markets, the decline in the strength of the euro will be particularly beneficial for Ireland, Mr Daly said in his note, released on St Patrick’s Day.

Concerns

“Real GDP rose by 4.8 per cent in 2014 and we expect a similar rate of growth in 2015. Such rapid growth is prompting concerns of a second Irish bubble but, while the rate of expansion is strong, the level of output remains depressed relative to before the crisis.

“In our view the economy has the scope to grow rapidly for some time without overheating.”

Mr Daly said that, while Ireland’s economic recovery was steady rather than spectacular during the period 2011 to 2013, in the past 18 months it had shifted into a higher gear.

This had been reflected in the unemployment rate, which is five percentage points lower than its peak, and employment, which has risen by more than 5 per cent from the trough.

The composition of the economic growth also appears healthy, with the strength of export growth in 2014 coming ahead of the expected boost from the weakened euro.

In addition to Ireland exporting heavily to non-euro economies, the country’s two largest markets for exports, the UK and the US, are themselves expected to experience relatively strong growth.

Ireland’s recent experience in wage and price levels, as well as the currency changes, mean it has now returned to a competitive situation vis-a-vis its export markets last witnessed in the late 1990s, Mr Healy said, citing figures from real, trade-weighted exchange rate calculations by the Central Bank.

But the level of Irish output still remains 4 per cent below the pre-crisis peak, unemployment still remains high, and unit labour cost inflation remains negative. Also house prices remain below their pre-crisis peak.

Politics

Referring to earlier notes on Ireland, Mr Daly said the bank no longer viewed mortgage arrears as representing the most important domestic risk to the economy.

“The biggest risk now, in our view, is provided by political developments in Ireland,” something Ireland shared with other European economies.

Opinion polls show support for Fine Gael, Fianna Fáil and Labour has fallen, while Sinn Féin might now be the most popular party in the country. Mr Healy said Sinn Féin’s economic policies focused on the rejection of austerity and were similar to those of Syriza and Podemos.

In his view, an important explanation for “mainstream” parties losing popularity when the economy is doing so well is provided by the fact that employment and income levels still remain weaker than they were before the crisis.

“If output, employment and incomes continue to grow rapidly during 2015, driving their levels back towards where they stood before the crisis, we would expect the mainstream parties to recover some support ahead of the election that is due in 2016.”