Political and economic uncertainty at home and abroad have caused the Economic and Social Research Institute (ESRI) to modify its growth forecast for the Irish economy in 2016.
The result is a deceleration in the rapid rate of growth, from 7.8 per cent of gross domestic product last year to 4.8 per cent in 2016. But the institute, in its latest quarterly economic commentary, suggests domestic factors – the level of consumption and investment – will continue to exert a greater influence on the growth performance of the economy.
However, it identifies a wide range of international concerns. These extend from unease about serious imbalances in the Chinese economy, to caution about the financial health of European banks, to worries about the strength of the European and US economies, to fears about the outcome of the ‘Brexit’ referendum in the UK in June.
And, as it points out, the “inconclusive nature” of the general election here has added to general uncertainty. Against that background, for the Irish economy to grow at close to five per cent this year – three times faster than that forecast for both the euro-area and the UK – would indeed be a remarkable performance.
Ireland’s economic recovery, which began in 2012, was initially dominated by export-led growth. This has since given way to a greater reliance on domestic sources. Last year Irish households increased their purchases of goods and services by the largest amount since 2007, a trend that the ESRI expects will continue this year and in 2017.
This increased spending by consumers reflects a significant improvement in household balance sheets. Household debt positions have been greatly reduced, declining by a quarter since their peak in 2008. Rising employment, falling unemployment, improving consumer sentiment allied to the growth in disposable incomes – extending to benefit more sectors of the economy – are all factors underpinning the strong rise in personal consumption.
The ESRI also notes that a 2.6 per cent rise last year in the number in full-time employment is an indicator of robustness in the labour market. An encouraging and welcome feature highlighted by the survey is the decline in the level of long- term unemployment which, at its peak, accounted for two thirds of total unemployment but has dropped to 54 per cent.
The ESRI manages to combine optimism about the economy with some caution, warning that international volatility risks exposing the Irish economy to adverse external shocks to which the public finances remain vulnerable.
Rightly – and mindful of what happened in 2008 – it considers the most prudent use of any buoyancy in tax revenues would favour investment in public infrastructure or reductions in the national debt, rather than “significant cuts” in personal taxes at this stage.