As we move into 2018, the Irish economy finds itself in the strongest position in a decade. A solid and broadly based economic recovery has become well established over the past three years. The year just past was a year of further solid progress for the economy. Growth remained very strong and most economic and financial indicators continued to evolve in a very positive manner. The unemployment rate has fallen to 6.2% of the labour force; employment has reached 2.21 million; although it plateaued during 2017, consumer confidence remains at high levels; the overall export performance remains positive, and Irish exporters are even managing to deliver strong growth in the UK market despite the strength of sterling; and consumer spending continues to steadily improve. The public finances are also in a much stronger position, but further progress is needed.

Ireland has been helped enormously by the fact that the global economic cycle has experienced a relatively strong
recovery over the past year or so. This is of crucial importance to a small open economy where external trade is so important.
Real GDP in Ireland is likely to have expanded by at least 5% in 2017 (higher than the official Budget 2018 forecast of
4.3%). Looking ahead to 2018, the Department of Finance growth forecast of 3.5% looks somewhat conservative. Real GDP
should be capable of expanding by at least 4% in 2018. This growth should be driven by the following factors:

  • The ongoing improvement in the global economy will prove supportive of the Irish export sector. The
    improvement in the Euro Zone should offset the weakness of the UK. Further sterling weakness does pose a threat to the indigenous export sector and visitor numbers from the UK;
  • Consumer spending should be supported by employment growth of 2.9%; average wage growth of around 4%; a modest easing of the tax burden; and growth of around 6% in personal disposable incomes; and
  • The investment performance in 2017 was distorted by multi-national transactions, but these should feed out of the system in 2018. Construction output should expand strongly and business investment expenditure should expand quite strongly;

All in all, the indications for the coming year are positive. It is essential that national policy focuses very strongly on
broadly-defined competitiveness. This includes wages and other business costs; IT infrastructure and capability; high-quality public services; prudent management of the public finances; and the personal tax burden.
The two biggest external threats to Ireland in 2018 and thereafter will be posed by Brexit and global corporation tax
developments, which have the potential to pressurise Ireland’s FDI model over the coming years. There will have to be a greater focus on providing support to the indigenous economy. Volatile global equity markets and a more aggressive tightening of monetary policy are two other external factors worth keeping a close eye on.

There is still no certainty as to how Brexit will transpire, but Irish business should plan for the possibility of a ‘hard
Brexit’ and act accordingly. If it turns out to be something softer, which is possible, that would be a bonus. The mantra
should be to plan for the worst and hope for the best.On the domestic front, the key challenges will be posed by the pressure to increase the quality and quantity of public services; growing wage pressures in the public sector; a shortage of labour in certain sectors; and the housing crisis. Ireland has an owner-occupier and a rental crisis that is due to demand exceeding supply. The simple solution is to identify and remove the barriers to delivering more housing, only then will equilibrium be achieved. Even if started now, this would take some time. Meanwhile, national average house prices could easily rise by 10% during 2018.

The following Irish economic forecast is suggested for 2018:

 

Interest Rates

The ECB remained very relaxed about interest rates during 2017, despite the relatively strong growth recovery in the Euro Zone. Euro Zone inflation remains well behaved at 1.3% and although the labour market is improving at a steady pace, the unemployment rate is still at a high 8.7%. However, this is the lowest level of unemployment since early 2009 and clearly demonstrates the rapid pace of improvement in the Euro Zone labour market.

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