OPINION: The Irish Economic Recovery
The Irish recovery dynamic is strengthening. Following the much stronger-than-expected first half performance revealed in the latest recent national accounts figures, analysts have been busy upgrading their growth forecasts in recent months. Even on conservative assumptions about the second half of the year, real GDP growth is now likely to exceed 4 percent this year on average, leaving Ireland on track to be the world’s fastest-growing advanced economy in 2014.*
One key driver of the stronger growth picture is a much improved export performance. This has been driven by the combination of much better sector-specific trends in pharmaceuticals/chemicals where the prior drag from the patent cliff has given way to renewed outright expansion, and improved growth momentum in Ireland’s main trading partners (especially in the U.K. and U.S.)—albeit that developments in pharma-chem are serving to exaggerate somewhat the underlying pace of export growth.
But crucially, the Irish recovery is also in the process of becoming more broadly based this year. In addition to positive export growth, both consumer spending and investment are back in expansion mode in 2014, marking the first year since 2007 that each of these three key areas of the economy will all be growing together.
Capital formation trends have firmed, reflecting strong gains in both construction and non-construction spending, while indicators on car and non-car retailing as well as consumer confidence have been pointing to better trends for some time now. Car sales are up over 30 percent so far this year, and while non-car retailing is not experiencing such punchy growth, it has established a pattern of sequential annual growth in volumes that extends back to the end of 2013. All of which is taking place against the backdrop of a much more upbeat Irish consumer, with confidence back to levels last seen in early 2007.
In turn, the consumer turnaround is being driven by the strength in key labor market trends, with solidly expanding employment now beginning to underpin better underlying income dynamics for the Irish household sector. Also encouraging is the evidence that the improvement that is being registered is not confined to Dublin. While jobs growth in Dublin is outpacing that outside the capital, over half of all the net new jobs created in the economy since early 2012 have been recorded outside Dublin. The national unemployment rate, having peaked in early 2012 at over 15 percent, is continuing to fall steadily with the estimate of 11.1 percent for September marking the lowest reading in some 5 ½ years.
The strengthening of the economy’s recovery dynamic is also benefiting the public finances which were well ahead of expectations at the end of September. This leaves Ireland on track to record a budget deficit of under 4 percent of GDP this year—well ahead of both the government’s planned 4.8 percent and the 5.1 percent ceiling set by Europe. That would also mark a fourth consecutive year of budgetary outperformance relative to target as Ireland continues her journey back to fiscal balance from the double-digit deficits recorded at the peak of the financial crisis.
This much more favorable deficit profile left the door open for a shift in the planned stance of fiscal policy for next year. This saw the government announce a modest (0.6 percent of GDP) stimulus package rather than the previously planned 1.1 percent corrective adjustment, while still planning to get the 2015 deficit below the long-standing 3 percent target. Thus, Budget 2015 marked the very welcome end of a very painful 6 ½ year correction in Ireland’s public finances: after a 30-billion-euro (17 percent of GDP) adjustment over 2008-14, fiscal policy is set to become a tailwind for the economy next year.
The budget also contained important messages regarding Ireland’s business taxation regime. Importantly, the government’s commitment to the 12.5 percent headline rate of corporation tax is unwavering: in the Minister for Finance’s own words: “The 12.5 percent tax rate has never been and never will be up for discussion.” The Minister also announced a change in tax residency rules so as to abolish the so-called “double Irish” from January 2015 for new companies, with a transition period to 2020 applying to existing companies. This is a pre-emptive and proactive move to head off criticism of Ireland’s regime and is part of a road map for Ireland’s foreign direct investment offering which also includes an improvement in the tax treatment of research and development spending and the launch of a consultation on a “knowledge development box”, to further promote knowledge-based investment and innovation.
International geopolitical tensions and a very weak euro zone recovery represent two downside risks for Ireland, but recent news on the economy has been very encouraging as both external and domestic demand are now contributing positively, and meaningfully, to growth. While headline growth rates may be painting a somewhat overly flattering picture of the extent of recent improvement, fading headwinds and emerging tailwinds, now also from fiscal policy, are promoting a stronger and more broadly based Irish recovery.
*Based on the IMF’s forecasts in its October World Economic Outlook
[Disclosure: Ulster Bank is a sponsor of Xconomy’s Innovation in Ireland special report. This op-ed post was selected by Xconomy’s editors because of its relevance to the topic and was not part of any sponsorship agreement.]
Simon Barry is Chief Economist Republic of Ireland with Ulster Bank.
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