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12 economic predictions for 2019

Dec 17, 2018

By Professor Neil Gibson

While there are growing concerns about the global economy and the spectre of Brexit looms large, Ireland enters 2019 in a position of strength. Its renowned international sector is now complemented by a strong domestic economy which is fuelled by fast job growth, real wage increases and strong inward migration flows. This domestic strength provides Ireland with short-term insulation against a global slowdown. However, this growth brings with it new problems, such as labour shortages, rising prices and pressure on public services – each of which will provide major challenges for policy makers and business alike.

In the spirit of the season, Ireland should celebrate the success of 2018, but some New Year’s resolutions will be necessary to stay fit and healthy for what lies ahead. Based on the EY-DKM Economic Advisory, here are my predictions for 2019:

Prediction 1: GDP growth will rise by 4.2%

GDP growth is projected to remain robust and above trend due to the strength of the domestic economy. Rising levels of employment coupled with increasing wages and higher levels of government spending all provide a solid platform for 2019 growth.
Biggest forecast risk: A slowing global economy hitting Irish multinational profitability.

Prediction 2: Employment growth will rise by 2.7% or 60,000 net jobs

The strength of the domestic economy should allow for growth in consumer businesses, including retail, restaurants, leisure and housing. The rapid move to online shopping is a notable headwind for high street retailers, but the scale of growth in consumer spending should be enough to offset this for now. Employment in public services is also increasing and, according to the EY’s Brexit tracker, Dublin is currently the most popular choice for relocation for those financial services firms who are decanting elements of their business from London.
Biggest forecast risk: High wage inflation deterring businesses from hiring.

Prediction 3: Wage growth will increase by 3.6%

A tight labour market should support strong wage growth, as will the easing of restrictions on public sector pay. Wage growth has accelerated throughout 2018 and should continue in the year ahead. Across certain sectors such as IT and construction, wage growth will be more than twice the national average.
Biggest forecast risk: Businesses ease off on hiring as nervousness over macroeconomic conditions grows.

Prediction 4: Consumer spending will grow by 2.9%

Population growth, an increase in the number of people in work, and above-inflation pay increases should provide very strong consumer spending growth conditions. This combination of positive factors makes 2018/19 something of a sweet spot for businesses selling to Irish consumers –  welcome relief after a very challenging decade.
Biggest forecast risk: Loss of consumer confidence arising from global concerns and a consequent increase in the tendency to save.

Prediction 5: Net migration will increase the population by more than 40,000

A growing labour market and lack of local supply will boost inward migration. In addition, there may be a positive Brexit effect as migrants looking to locate (even temporarily) to a prosperous market with English as the predominant language may choose Ireland. Even if the UK migration rules are relatively relaxed, or not yet in place, there will be a perception effect which will boost Ireland’s attractiveness.
Biggest forecast risk: The high cost of rent and availability of housing may curtail migrant flows.

Prediction 6: Inflation will push upwards by 1.8%

Inflation depends heavily on exchange rates, and an appreciating euro would keep inflation low, but housing costs and the effect of rising wages should allow prices to push upwards. Low oil prices may ease the pressure somewhat, but in such a rapidly growing economy, inflation is likely to begin to pick up from its current very low levels.
Biggest forecast risk: An appreciation in the euro or falling oil prices.

Prediction 7: House prices will increase by 4%

Prices have been rising significantly (more than 30% over the last three years) but the impact of policy changes to tighten lending criteria, and a steady growth in supply, should provide something of a cap on increases. A more sustainable rate of growth is predicted, but the migration outlook will keep applying upward pressure, though this will be more acutely felt in rental prices.
Biggest forecast risk: If supply does not keep pace with demand then prices may rise faster.

Prediction 8: Construction inflation will rise by 7.5%

Strong demand for house building in addition to an acceleration in government infrastructure spending create positive conditions for construction and, therefore, rising prices. Labour shortages in the sector will further apply upward pressure on construction inflation. The long slowdown severely reduced the number of firms in the sector and it is more difficult to attract construction workers to return to Ireland, given the pain of the previous crash. Equally, the supply of labour from a number of Eastern European markets is not as plentiful, as those markets are enjoying stronger domestic conditions themselves.
Biggest forecast risk: Demand and supply mismatches may make this prediction conservative.

Prediction 9: Housing completions will top 25,000

Demand for housing is very strong heading into 2019, and increased migrant flows will give it a further boost. Housing is also a political priority, and the modest slowdown in commercial building is diverting resources into the booming residential market.
Biggest forecast risk: High construction price inflation could mean that some developments are no longer viable.

Prediction 10: Total tax collected from businesses and tax payers will rise by 4.2%

A strong labour market and high levels of growth in consumer spending should support growth in VAT and income tax receipts. Corporate taxes are more difficult to predict and more heavily impacted by global conditions than domestic taxes.
Biggest forecast risk: A global slowdown sharply impacting corporation tax and, therefore, the overall tax take.

Prediction 11: Government will spend more than it collects in taxes by 0.1% of GDP 

Ireland looks set to enjoy its first positive general government balance (the difference between what it collects in taxes and what it spends) in a decade in the 2018/19 fiscal year. This is largely due to above-forecast corporation tax receipts, which are notoriously volatile. The political pressures to spend are considerable, and the forecast is therefore that the fiscal balance will tip back slightly into the red in 2019 as public spending pressures remain acute.
Biggest forecast risk: A global slowdown sharply impacting corporation tax and, therefore, overall tax receipts

Prediction 12: The unemployment rate will reduce further to 4.9%

A strong rate of jobs growth is predicted to drive unemployment lower, back to levels last seen at the peak of the previous boom. Rising wage rates may draw some people into searching for a job who were previously not actively looking (economically inactive) and the strong migrant flow will prevent the rate falling more sharply.
Biggest forecast risk: A loss of consumer confidence from wider macro conditions which would reduce employment in consumer sectors quickly and sharply.

Professor Neil Gibson is the Chief Economist at EY Ireland.