Pace of economic growth strong in 2018, moderating in 2019 & 2020

• Upward revisions to growth and employment forecasts for 2018 and 2019 – 2020 forecasts also published for first time
• Material domestic and external risks to growth forecasts persist
• New research on implications for Irish economy of future trade agreement in line with UK Government’s Brexit White Paper

The Central Bank of Ireland has today published its fourth 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 economic policy issues.

The Bulletin reports:

• Underlying domestic demand projected to grow by 5.6% this year (revised up from 4.4% in the previous Bulletin), moderating to 4.2% in 2019 and 3.6% in 2020.
• Projections for the labour market continue to signal that the economy is moving towards full employment, although some extra capacity is possible through further inward migration and increased participation in the labour market.
• This suggests an additional 154,000 jobs by 2020, with a new peak employment level of 2.35 million expected.
• Although headline measures remains volatile, evidence suggests a marked acceleration in the growth of some important domestic investment components, particularly housing and non-residential construction.
• Projections for new dwellings completions revised up since the last Bulletin, to 19,000 this year (+1,500), 24,000 in 2019 (+2,000) and 28,500 in 2020.
• Compensation per employee forecast to increase by 2.8% in 2018, rising to 3.3% in 2019 and 3.4% in 2020.
• Inflationary pressures remain well contained despite the strength of domestic demand and tightening labour market conditions. HICP inflation is projected to remain stable at 0.8% in 2018 and 2019, rising marginally to 1.1% in 2020.

The Quarterly Bulletin also highlights a number of material risks to economic growth:

• The risk of overheating arising from the strength of domestic demand and tightening labour market conditions.
• Risks to corporation tax flows – see Box C. As a proportion of overall taxation, Ireland is second only to Luxembourg in terms of reliance on corporation tax within the European Union (EU). Coupled with the high concentration of foreign owned multinational firms (especially U.S. firms), this leaves Ireland more exposed than other EU countries to changes in the international tax and trade environment.
• A disorderly Brexit, which would pose immediate challenges for the Irish economy and financial system.
• The Bulletin also examines another Brexit scenario in greater detail. Box A looks at the macro-economic implications of the proposals contained in the UK Government White Paper, often referred to as “Chequers.” While the decline in Irish economic activity would be just over half as severe as a scenario based on World Trade Organisation tariffs, the proposed arrangement would still have a significant negative long-run impact on Irish output and employment. Compared to a European Economic Area-style baseline, where the UK maintains a close trading relationship with the EU, the following outcomes are projected after five years, albeit the Central Bank still expects overall positive output and employment growth over the period:
  - level of employment 1% lower
  - level of Irish GDP 1.7% lower

Mark Cassidy, Director of Economics and Statistics, said:

“Today’s forecasts are for strong growth this year, moderating somewhat in 2019 and 2020. We expect more than 150,000 additional jobs to be created in the economy by 2020 and with consumer price inflation likely to remain subdued, significant gains in terms of real purchasing power can be expected.

“However, while this is all very welcome, Ireland must learn from past mistakes and be pro-active in guarding against boom-bust cycles, by building up buffers to limit the costs of future downturns.

“This is all the more important given the clear risks facing the economy. Compared to our European neighbours, we remain particularly vulnerable to potential shifts in the international tax and trade environment. The threat of a disorderly Brexit, which would have an immediate disruptive effect on the Irish economy, remains ever present, while our research shows that the impact of a more favourable or “soft” Brexit outcome would still hit Irish economic output, exports and employment.”

Transcript of media briefing with Director of Economics and Statistics