At 6.7 per cent of GDP, the Irish economy is forecast to grow in 2015 at its most rapid rate since 2005, according to the Economic and Social Research Institute (ESRI). Ireland is also Europe’s fastest-growing economy, greatly helped by a number of favourable developments: a weak euro; falling oil prices; and strong demand in key export markets, the US and the UK. These factors, in conjunction with improved cost competitiveness and increased domestic investment and consumption, have boosted growth.
Can the rapid pace of economic recovery be sustained in 2016? The ESRI, in its latest quarterly report, remains optimistic that it can, albeit with some caveats. It has forecast a 4.8 per cent rate of GDP growth next year, with unemployment dropping below 8 per cent by the end of 2016, and employment forecast to exceed two million within a few months. However, the institute has identified potential adverse developments in the global economy that could jeopardise its forecast.
The risk factors include a sustained slowdown in China which is a key concern, given the Chinese economy’s role in recent years as the engine of world growth. A major economic downturn there would weaken demand in Ireland’s main export markets and depress growth in the domestic economy. Another concern is a possible British exit (Brexit) from the European Union, following a referendum that may be held in June.
Last month an ESRI study of the implications of Brexit made for grim reading. The report suggested bilateral trade between Ireland and the UK could be reduced by 20 per cent or more should Britain vote to leave. A further potential threat to the ESRI’s ambitious growth forecast – though not one identified by it – arises closer to home. This takes the form of political uncertainty following the general election should a government with a stable parliamentary majority fail to be formed.
The ESRI has followed the Irish Fiscal Advisory Council’s lead and criticised the Government’s adoption of a pro-cyclical policy in Budget 2016, in adding €2.8 billion in tax and spending measures to boost the economy at a time of rapid growth.
The institute has also identified difficulties in the housing market, where it suggests balance between supply and demand – attainable by building 25,000 housing units each year – may not be reached before 2018. The Government is unlikely to meet the social housing targets it has set for the period 2015-2020.
The decision this week by the Federal Reserve (the US central bank) to raise short term interest rates for the first time in nine years has eased worries in financial markets and opened the way for further modest rate rises in the years ahead.
But whether this goal can be achieved without jeopardising the recovery of the American economy or destabilising developing economies, already in difficulty, remains the great global uncertainty.