Ireland’s recovery ‘now being driven by domestic demand’

Ireland’s recovery is now being driven by a rebound in domestic demand, the Department of Finance’s chief economist John McCarthy has said.

Until quite recently, growth in the economy was almost entirely fuelled by exports tied to stronger demand in the US and the UK.

However, Mr McCarthy said the underlying dynamic of Irish recovery had changed in the past year with the lion’s share of growth now coming from domestic activity.

“There is now concrete evidence that recovery is broadening, and by that I mean, domestic demand will for the first time make a positive contribution to growth.”

Mr McCarthy was appearing before the Oireachtas finance committee this evening, where he set out the macro-economic assumptions underpinning next week's budget.

He said the department was now predicting economic growth of 4.7 per cent this year, more than double its previous forecast in April, and 3.6 per cent next year.

These forecasts, he said, had been endorsed by the Irish Fiscal Advisory Council, the statutory body set up to monitor Government economic policy.

He said about three-quarters of this year’s economic growth would come from a resurgence in domestic demand, particularly investment.

The department is predicting investment will grow by 14.5 per cent this year on the back of growth in building and construction and the purchase of new machinery by firms.

In the wake of the financial crash, domestic demand in Ireland - the main component of which is consumer spending - fell by 20 per cent, crashing retail sales.

From the Government’s perspective, Mr McCarthy said domestic demand is “much more employment rich and much more tax rich”.

Nonetheless, he said net exports would still make an extremely positive contribution to growth, accounting for about 1.5 per cent of growth.

One “cloud on the horizon” is the euro area, he said, where economic activity completely stalled in the second quarter of this year.

Mr McCarthy said the economic slowdown in the euro zone posed the chief downside risk to the department’s growth forecasts.

He said the risk of deflation remained low but he did not rule a prolonged period of low price growth.