Previewing Ireland’s economy in 2018: It’s gonna get better, before it gets worse

PEOPLE LIKE TO have something to look forward to. That’s why, even in the dark days of December, people look forward to ringing in the New Year, full of new possibilities.

They may call economics the ‘dismal science’, but even economists are not immune to looking for silver linings among the winter clouds. So, what’s in store for the Irish economy in 2018, I hear you ask?

*** This article was first published on thejournal.ie on 22 December, 2017 ***

Growth forecast

The latest data from the CSO number crunchers suggest an economy in rude health. The official numbers suggest the economy, as measured by GDP, was more than 10% larger in the three months to end-September than a year earlier, and up more than 60% from the mid-crisis low recorded in early 2013.

True, these eye-watering numbers owe much to the distortions caused by multinational activity, dubbed ‘Leprechaun economics’ by some. But, even the least distorted element of GDP, personal consumption, is up 2.8% on a year earlier, and 14.3% since the first three months of 2013.

Just last month, the European Commission upgraded its growth forecast for Ireland and the EU as a whole. Even though Irish GDP is projected to slow slightly, from 4.8% this year to a still-healthy 3.9% in 2018, this is still enough to see Ireland retain third place in the growth league table, behind only Malta and Romania.

Ireland’s growth rates this year and next are expected to be about double the rates in Germany and three times the rates in the Brexit-stricken UK.

As a small, open, trading nation, we are benefitting from the most sustained and synchronised expansion in the global economy in a decade, with all major regions growing simultaneously and relatively strongly. The OECD recently revised upwards its global GDP growth forecasts to 3.6% in 2017 and 3.7% in 2018.

Of course, you can’t eat GDP. So, what does it all mean for you and me?

More people back at work

The Irish economy is generating more than 1,000 full-time jobs every week, while people are increasingly moving from part-time to full-time work. Unemployment is on course to fall towards 5% by the end of 2018, levels not seen since 2007.

After half a decade of stagnation, wage growth is starting to show signs of life, with hourly earnings up 2.2% in the past year and the ESRI predicting they will increase by 3% in 2018. Average weekly earnings have barely moved since early 2016, while hourly earnings have actually fallen slightly.

Given this relatively rosy picture, it doesn’t come as much surprise that inflation has turned a corner too. Having been falling until the middle of this year, there are early signs that consumer prices are starting to pick up, with inflation expected to accelerate through 2018.

Tax changes and the 30 cent an hour increase in the minimum wage, both announced in October’s budget, should provide a further modest but welcome boost to pay packets when they kick in in January. In such an environment, it won’t come as any surprise if the coming months see consumer confidence surpass the post-crisis high set in February 2016 to reach levels not seen since 2006.

Risks over the horizon

The government’s much-needed plan to hike capital spending is likely to further boost the economy over the coming years, while ensuring infrastructure is in place to support growth over the longer term.

An extra €790m capital spend was allocated for 2018, bringing the total to €5.3bn for the year, a stepping stone towards the €7.8bn foreseen annually by 2021. About a third of the 2018 capital spend, or €1.8bn, will be dedicated to housing, funding the construction of 3,800 social homes.

Even if the number of houses being constructed is already starting to pick up, it is a drop in the ocean compared to the number needed to provide for new households, let alone clear the backlog of recent years and truly address the housing crisis.

But, as the ESRI and others have pointed out, the expected normalisation of housebuilding could cause the economy to overheat just as it approaches what economists call ‘full employment’. As Ireland learned in the early years of the 21st century, an overheating economy can feel great at the time, but it stores up problems for the future.

The elephant stomping around the room

Without doubt, Brexit is the elephant stomping around the room. Already, the UK’s economy has slowed and sterling has weakened, hurting Irish exporters. Things could get infinitely worse if the negotiations go pear-shaped during 2018, resulting in a ‘hard Brexit’ and new tariffs on our trade with Britain.

Recent research has shown that Ireland is the country with most to lose from Brexit under any scenario; even more than the UK itself. But, Irish job losses could reach 50,000 (about 1 in 40 jobs in the country) in the event of a ‘hard Brexit’ in early 2019, nearly 5 times worse than a ‘soft Brexit’ scenario.

Another fly in the ointment is the tax reform package passed in the US this week, which will see their corporation tax rate reduced from 35% to 21% from 2018 onwards.

Other changes included a 15.5% amnesty rate at which US multinationals can repatriate historical profits and a move towards a ‘territorial’ tax system whereby global profits of US multinationals will be exempt from US taxes going forward. The aim of these reforms is to bring jobs and investment back to US, meaning places like Ireland could lose out in the future.

Apple Inc alone is reported to be in line to gain $47bn from the amnesty, given that it maintains a cash mountain of over $200bn in Ireland and other jurisdictions.

Things likely to get a bit better

These tax changes will take time to feed through to multinationals’ investment decisions, and may not in any case lead to the scale of ‘re-shoring’ of jobs to the US that has been hoped for (or feared, from an Irish vantage point). So, the impact in 2018 may be rather limited, but can expect to be felt from 2019 onwards.

Other headwinds from the US include further interest rate hikes, although in Europe the ECB has signaled its intention to keep printing money until at least next September, while any interest rate rises would be even further in the future.

But, none of Brexit, US tax changes, ECB interest rate rises or the fallout from an overheating economy are expected to weigh heavily on Ireland in 2018. Even buoyant financial markets look set to continue defying economic gravity in the short term. Our national economic wellbeing may be haunted by the ghost of Christmas Past, and fearful of the ghost of Christmas Yet to Come.

But, for most of us, we can rejoice with the ghost of Christmas Present safe in the knowledge that things are likely to get better, before they get worse.

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