The US and China produced unexpectedly disappointing manufacturing data and global financial markets have tumbled in response. Any sign of a potential slowdown in economic growth in the world's two largest economies – and therefore of lower demand – greatly increases uncertainty and reduces investor confidence. When these developments are accompanied by increased geo-political risk in the Middle East, as political tensions escalate between Saudi Arabia and Iran, there is further cause for concern. The global economy could hardly have had a less auspicious start to the new year.
By contrast at home, Ireland’s strong economic performance has been buoyed by impressive Exchequer returns for December, where estimates and expectations have been surpassed once again. Tax revenue in 2015 was €3.3 billion more than originally forecast, boosted by strong income tax receipts, reflecting increased employment and higher earnings, and by a huge rise in corporation tax revenue – almost 49 per cent more than the 2014 figure. At the same time one-off receipts from the State-owned Allied Irish Banks, Permanent TSB and from Bank of Ireland and Aer Lingus have ensured the public finances are close to balance for 2015. However, net current spending was almost €1 billion above target for the year due to extra expenditure – mainly in health, social protection and education.
The improved state of the public finances has been matched by a fall in the interest rate payable on Ireland’s 10-year sovereign debt, now at some 1.1 per cent. Unemployment at 8.8 per cent is at its lowest since 2008, while the number in employment is moving closer to two million people.
The strength of Ireland’s economic recovery owes much to highly favourable global developments. A weak euro has kept interest rates low, falling oil prices have boosted consumption and left consumers with increased spending power, while strong growth in both the US and the UK has greatly helped exports. Negative developments in China and the US may not have a direct and immediate impact on the domestic economy but, in a globalised world and as one of the world’s most open economies, Ireland is not insulated from adverse developments elsewhere.
Ireland greatly depends on a benign international economic environment for rapid growth at a time of increased uncertainty. How rapidly will the US Federal Reserve raise interest rates in 2016? In the UK, how might a negative outcome to the EU referendum depress growth there? And how might changes in international tax rules adversely affect Ireland's corporate tax revenues?
As the political parties prepare for a general election, their programmes should include a realistic appraisal of some of the potential downside risks facing the domestic economy.