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Economic growth set to continue in 2020 but at a reduced rate

Jun 28, 2019
Despite operating in the presence of a considerable degree of uncertainty, the Irish economy continues to grow at a robust rate. The domestic economy is now expected to grow by 4% in 2019 and 3.2% in 2020. These growth rates are up marginally on the ESRI's forecasts in previous commentary.

These forecasts for 2019 and 2020 are subject to the technical assumption that the UK's continued membership in the EU will effectively remain in place after October 2019.

This continued strong performance comes at a time when the international environment is characterised by substantial risks due to both Brexit and the deterioration in the trade relationship between the United States and China. In this commentary, we examine in some detail the impact of uncertainty on both domestic consumption and investment decisions. The analysis suggests that Brexit has already had a negative impact on the Irish economy via consumer expectations about domestic growth, while investment amongst firms located in Ireland is particularly susceptible to international policy uncertainty, in this case with respect to the United States.

Given the particularly robust performance of the Irish labour market, it is clear that the domestic economy is now effectively operating at full capacity. The unemployment rate is forecast to fall to 4% by the end of 2020 with evidence of wages and costs increasing in the economy. Consequently, given the envisaged increase in capital expenditure in the economy, we believe it may be necessary for the Government to run a contractionary budget in 2020 to prevent the economy from overheating. This could involve the Government increasing taxes in areas which would not have a distortionary impact on the labour market. However, this policy may have to be re-examined in the event of a negative economic shock associated with a 'no-deal' withdrawal of the UK from the European Union.

Published: 20 June 2019.
 
Source: The Economic & Social Research Institute (ESRI).