The Central Bank has forecast that Irish economy will grow at close to 5 per cent in 2016, adding a “convincing recovery” is well-established on the domestic side of the economy.

The bank, concerned about external risks to the recovery, also forecasts a continuation of strong growth in 2017 but at a slightly slower rate.

While the forecast represented the bank’s assessment of what would happen on the current information, chief economist Gabriel Fagan said there were many uncertainties. Downside risks were linked to China but not only to it, he said.

“If we look at the other emerging markets economies there are obviously very significant downside risks there as well. Another source of risk to the economy of course is coming from financial markets,” he told reporters.

“We’ve seen significant falls in stock prices so far this year. We’ve seen a lot of turbulence in oil markets and in foreign exchange markets as well. There are a lot of risks to this forecast and they are from the external point of view on the downside.”

Political uncertainty

Asked about the possibility of political uncertainty in the wake of the general election, Mr Fagan said “adverse consequences” might be expected if there was considerable uncertainty. He added, however, that there was no evidence at this point of market concern about the prospects for the election.

In its new quarterly assessment, the bank marginally upgraded its 2016 forecast. Data suggest the economy is in a period of exceptionally strong growth likely to ease only modestly this year and next, it said.

Having concluded that Ireland’s gross domestic product is likely to have grown by 6.6 per cent in 2015, the Central Bank said domestic demand would continue to be the main driver of growth in 2016.

“GDP growth of 4.8 per cent is forecast for 2016, a marginal upward revision to the previous projection, while the forecast for gross national product growth, at 4.3 per cent, is marginally lower,” the bank said.

“In 2017, on the basis of forecasts of growth in trading partner countries consistent with those underlying the latest ECB macroeconomic projections and reflecting some moderation in the growth of domestic demand, GDP is forecast to grow by 4.4 per cent, with GNP projected to rise by 3.9 per cent.”

Such forecasts for GDP growth are higher than the last Government forecasts, in the October budget. It forecast 4.3 per cent GDP growth for 2016 and annual growth at around 3 per cent thereafter.

The forecast said risks were judged “for now” to be balanced and “tilted to the downside” for 2017.

Resilience of growth

Citing concerns about the resilience of growth in emerging market economies and expectations about diverging monetary policies in advanced economies, the bank said a “gradual and timid” recovery continues in the euro area. “The recovery continues to be supported by low oil prices, a relatively weak external value of the euro and a very accommodative monetary policy stance.”