Is Ireland best in class?

Jan 03, 2019
What’s in store for the Irish economy in 2019, and can we learn from our past mistakes to secure our future? Annette Hughes, Director, EY-DKM Economic Advisory Services, explains in this economy series.

Have you ever thought about why there is the tendency to always think of the New Year as a fresh start? Perhaps this is because as another year dawns, new opportunities to improve ourselves arise. It can generate opportunities for progress and new ideas, but it also brings many challenges. For the most ambitious amongst us, there can be a sense of excitement as to what the New Year will have in store. However, others may face it with some degree of trepidation.

In many respects, the economy is no different. A new year brings many opportunities, including the potential to achieve further economic growth and boost the productive potential of the economy. Growth this year will again will be influenced by a number of factors, notably the direction of Government policy and the state of the public finances, trends in income and employment, our demographics, the level of public and private sector investment as well as the level of confidence in the economy across the business and household sectors.

The Irish economy was ‘best in class’ in the European Union for the fifth year in a row in 2018. The economy expanded by 7.2% (GDP measure) in 2017 and is estimated to have expanded by around 8% in 2018. While these headline growth figures somewhat exaggerate the true performance due to the globalisation activities of multi-national corporations, the underlying growth of the economy is estimated to be closer to 4.5–5.5%. This reflects trends in alternative indicators like the growth in employment, tax revenues and modified domestic demand, which captures trends in domestic expenditure by government, consumers and investment spending (excluding investment in intangibles and aircraft). The very strong employment numbers to date – almost 70,000 jobs created in the twelve months to Q3 2018 – and the anticipation of close to full employment this year, along with population growth and rising real wages, should translate into increasing incomes and spending power. These economic conditions are expected to result in another strong performance this year, although GDP growth is expected to moderate to 4.5%. They are also likely to result in the acceleration of the level of immigration to supply labour, and will require increased public capital investment to ensure more sustainable growth.

This success brings many challenges for the Irish economy, a number of which are pre-existing problems, i.e. the ongoing housing supply problem and the shortage of affordable accommodation. This is a major threat to Ireland’s ability to attract and retain talent, particularly given the skills shortage which is pushing up wage costs and damaging competitiveness. Other problems of success in the domestic economy include the growing traffic congestion in Dublin in particular, which is adding to commuting times and business costs. An interesting statistic regarding the M50 motorway is that it is operating at full capacity and it is estimated that it has already reached the traffic volumes projected for 2023. The National Development Plan and Project 2040 have set out long-term objectives for investment in high-quality infrastructure, but there is a critical need to address immediate infrastructure constraints in the short term. Managing the scale of investment on time and within budget, while ensuring we continue to reduce our national debt and avoid the risk of overheating, will be a major challenge over the medium term.

Ireland is a textbook case of a small open economy. As such, it needs to be competitive to ensure businesses can trade internationally. The recent Scorecard from the National Competitiveness Council (NCC) showed that Ireland has fallen in the Global Competitiveness rankings. Moreover, the NCC cautioned that the loss of competitiveness in the run up to the previous global financial crisis left Ireland particularly vulnerable. To avoid repeating the mistakes of the past, the NCC has recommended that competitiveness and productivity are positioned as a central pillar of Ireland’s economic policy.

As an open economy, Ireland is also vulnerable to the potential disruptive trends emerging in the global environment. There are threats to international trade flows from the imposition of trade tariffs and the growing possibility of a No Deal Brexit (at the time of writing). We heard before Christmas that this would have significant macroeconomic and trade impacts as well as substantial adverse economic and social impacts. With global growth projected to slow this year, there is no room for complacency. So any sense of excitement as we commence 2019 is likely to be matched with some degree of trepidation amongst consumers and households who are possibly facing one of the most uncertain years in a decade.

Welcome to 2019!

Annette Hughes is Director at EY-DKM Economic Advisory Services.