Strong growth forecast, but take nothing for granted

• Economic growth driven by domestic activity and international growth, with positive contribution from both domestic demand and exports
• As the economy gets closer to full employment, wages expected to rise at a faster pace
• Nature of Irish economy means national and private finances must be resilient to unexpected events

The Central Bank of Ireland has today published its second Quarterly Bulletin of 2018. The Bulletin examines recent trends in the domestic economy and provides the Central Bank’s forecasts for the Irish economy and its views on domestic macro-economic policy issues.

The Bulletin reports:

• Small upward revisions to the projections for growth in 2018 and 2019. The economy is forecast to grow 4.8% for this year and 4.2% next year (up 0.4% and 0.3% respectively from the previous bulletin)
• Unemployment projected to average 5.6% in 2018 and 4.8% in 2019 (down 0.1% and 0.4% respectively from the previous bulletin)
• An additional 99,000 persons forecast to be in work by the end of 2019 - compensation per employee projected to increase by 3.3% on average this year and next
• A gradual pick-up in headline inflation, projected to average 0.8% in 2018 and 0.9% in 2019
• A new method for forecasting housing completions (Irish economy chapter, Box C), projecting approximately 23,500 units in 2018 and 28,500 in 2019

Mark Cassidy, Director of Economics and Statistics, said: “The Irish economy continues to perform well, buoyed by domestic activity and international economic growth. Our forecasts for further growth in earnings this year and next, combined with expectations of modest inflation, means rising wages should translate in to higher real incomes and greater purchasing power for households.”

The Bulletin also outlines a number of risks to the projected growth of the Irish economy, including uncertainty around the implications of US tax reform, possible changes to the taxation of digital services and the risk of protectionist international trading measures.

Mr Cassidy continued: “While today’s forecasts are positive, we have to remember that the highly open and therefore volatile nature of the Irish economy means we can take nothing for granted. We have extensive links to other economies through trade, technology and finance and so unexpected events could see the growth in our economy thrown off course. As such, both the national and private finances need to be managed in a way that prepares for the unexpected, rather than relying excessively and unrealistically on Central Bank forecasts.”

The Central Bank also continues to highlight the risks posed by Brexit. If there is a substantial shift in the regime governing UK-EU trade, there will be a costly diversion of resources to logistics and trade-processing systems. Should extra transit time and additional administrative burdens increase the costs of importing and exporting, both Irish consumers and exporters will be negatively impacted. New research on the effect of a hypothetical 10% depreciation in sterling is also published (Irish Economy chapter, Box B) and shows a small fall in employment and wages as a result.

Mr Cassidy concluded: “Domestic demand and positive global economic conditions have seen Ireland absorb the impact of Brexit with relatively little pain to date. However, any obstacles to the way the UK currently trades with the EU is likely to generate a reduction in long-term living standards in Ireland, reduce the range of imported goods available to Irish consumers and make it more difficult for domestic firms to export their goods.”