12 economic predictions for 2020

Jan 03, 2020
By Neil Gibson

While the economic outlook for Ireland is slightly cooler than the last two buoyant years, it is not entirely unwelcome as the pressures of fast growth are beginning to become more visible. Here are 12 predictions for the economy in 2020.

Prediction 1: GDP will rise by 3.2%

Strength in the domestic economy resulting from a combination of job growth, real wage growth and government spending is projected to compensate for weakening global conditions. GDP is expected to be above trend at 3.2% in 2020. Modified domestic demand, which strips out the main distortions in Irish GDP, is forecast to grow at a similar rate (3.1%). Ireland will, therefore, remain near the top of the European growth charts.

Biggest forecast risk: A global slow-down.

Prediction 2: Employment to rise by 1.7%

Job growth is expected to remain robust in 2020 with 40,000 net jobs for Ireland projected, a slight reduction on the 56,000 in 2019. Consumer and government spending will boost domestic businesses and strong migration will allow firms to keep recruiting.

Biggest forecast risk: Skills gap and housing shortages prevent firms getting the talent they need.

Prediction 3: Wage growth at 3.5%

Wage growth has picked up over the last 18 months as labour supply tightens and skills gaps emerge in key sectors. The growth is also partly compositional with more hiring at the senior level, pushing up the overall average wage. Overall, average wage growth is projected to slip back very slightly from its 2019 level to 3.5% in 2020.

Biggest forecast risk: Wage inflation accelerates as firms struggle to get the labour they need.

Prediction 4: Consumer spending growth of 2.4%

Despite signs of ebbing confidence in consumer surveys, the rate of job and wage growth should support a healthy 2.4% growth in consumer spending in 2020. With the national savings ratio at a healthy level and confidence largely restored in the property markets, fears over Brexit and the global economy appear to be only having a modest effect on consumer behaviour.

Biggest forecast risk: Consumers’ confidence, which is already fragile, finally impacts behaviour and people choose to spend less.

Prediction 5: Net migration of 40,000

Ireland remains a very open economy with fluid labour movements both in and out of the country. Net migration is projected to reach 40,000 in 2020 with Ireland’s economic strength and improved relative attractiveness as an English-speaking, cosmopolitan location further boosting inflows. This flow will continue to drive demand in the economy but will add to the pressure on public services and Ireland’s infrastructure.

Biggest forecast risk: Insufficient housing supply leads to further rent appreciation which, in turn, deters migrants from coming to Ireland.

Prediction 6: Inflation of 1.6%

It is one of the great economic puzzles – how has inflation remained so low? With rising wages and a strong economy, most economic models would project a rise in headline inflation. A depreciation in sterling has helped keep Irish inflation down but high levels of competition may also have mitigated against firms increasing their prices. It may also reflect the application of new technology and data analytics as cost control measures. The twin conditions of healthy job/wage growth and low inflation has made it a very strong 18 months for domestic businesses.

Biggest forecast risk: Inflation picks up sharply as wage increases lead businesses to feel confident about price increases and a wage/price spiral begins.

Prediction 7: House prices to increase by 3.2%

House price growth has slowed markedly in the last 12 months. Unusually, this is in not in response to a weakening economy but partly because of the lending rules that have placed a harder ceiling on borrowing. This has been a welcome outturn for the Irish economy overall, though it has not been helpful in accelerating the development of much needed additional housing supply. Our forecast is for prices to pick up slightly from the current growth rates, reflecting demand and affordability in the wider economy.

Biggest forecast risk: Despite lending rules, increased cash investment triggers a rapid step up in prices.

Prediction 8: Construction inflation of 7%

Because of the strong overall economy, construction will continue to perform well with domestic and commercial demand remaining strong. In addition, increased levels of government capital spending are providing a further boost and, consequently, inflation in the sector is very high. Cooling global conditions may take a little heat out of the input and material prices but wages look set to continue to increase.

Biggest forecast risk: An uptick in domestic building, coupled with infrastructure spending and further commercial development, creates a ‘perfect storm’, pushing construction cost up even further.

Prediction 9: Housing completions: 24,000

Despite net migration of 34,000 into Ireland in the year to mid-2019 and a long-standing stock shortage, housing completion levels remained well below the required level at the end of last year. A moderation in house price growth, opportunities elsewhere in the construction sector and a challenging planning and regulation environment continue to work against a more marked acceleration in house building. Fortunately, the constrained supply has not resulted in an unwelcome sharp pick-up in prices.

Biggest forecast risk: Sluggishness in granting permissions and significant opportunities elsewhere in construction lead to lower completion levels.

Prediction 10: Tax receipts: 4%

Tax receipts have been very robust across all major categories. Though corporation tax increases have made the headlines, income tax and VAT have also grown strongly, reflecting the broad-based economic growth under way in Ireland. It remains hard to predict tax receipts as Ireland’s fortunes have considerable exposure to a very small number of firms, but the forecast for continued job growth and healthy wage increases mean a very healthy 4% is our central forecast for 2020.

Biggest forecast risk: Adverse global conditions impact the small group of firms that contribute a large proportion of corporation tax receipts.

Prediction 11: Government balance at 0.1% of GDP

That the Irish economy is back into general government surplus is both a cause for celebration but also somewhat concerning. The €175 billion debt mountain remains almost untouched, despite the sustained period of fast growth, making the rather cautious Budget set by the Minister for Finance both understandable and advisable. The forecast of a very modest surplus this year reflects uncertainty over the volatile corporation tax receipts and the long list of calls on government budgets across most areas of public service.

Biggest forecast risk: Demand for investment in public services, partly driven by population growth, leads to higher levels of government spending.

Prediction 12: Unemployment rate of 4.6%

Unemployment has been falling steadily for seven years since its peak of over 15%. Employers are finding labour harder to find, though even at the 4.6% rate projected for 2020, it is still some way from being considered full employment. The steady flow of migration and demographic factors mean that the strong job forecasts will not translate into an equivalent fall in unemployment. Nevertheless, we project it will continue to fall to its lowest rate since 2005.

Biggest forecast risk: A global slowdown eases hiring and with strong migration flows, unemployment levels move into reverse and start to rise again.

(The predictions assume the avoidance of a no-deal Brexit in 2020.)

Neil Gibson is the Chief Economist in EY Ireland.