Oliver Mangan, Chief Economist at AIB, discusses the performance and current status of the Irish Economy in relation to world economic recovery.
Irish Economic Recovery Follows Global Trend Onto Firm Footing
There is growing optimism that the world economic recovery will pick up pace this year, and that bodes well for Ireland, writes Oliver Mangan Chief Economist at AIB.
Last week, the Bank of England became the latest body to revise up its growth forecasts. It is projecting that the UK economy will grow by 2.9% this year, compared to 2.6% last year. It expects the UK economy to also expand by 2.9% in 2016, an upward revision from its previous forecast of 2.5%.The eurozone economy grew by 0.9% last year after contracting in both 2012 and 2013. The European Commission recently revised up its growth projection for the eurozone economy by 0.2% to 1.3% in 2015 and 1.9% in 2016.
Thus, it expects the eurozone recovery to gain momentum over the next two years. Meanwhile, last month saw the IMF increase its GDP forecasts for the US economy to 3.6% for this year and 3.3% in 2016, an upward adjustment of 0.5% and 0.3%, respectively. It compares with a growth rate of around 2.3% in the past three years.
It should be noted that recent years have seen many forecasts for stronger growth by the world economy. However, these failed to materialise and it continued to expand at a relatively subdued pace. Nonetheless, developments since last summer have seen growing optimism that the recovery in the world economy will pick up pace in 2015 and 2016. In particular, it is expected that the sharp fall in energy prices will lead to a pick-up in global growth. The IMF estimates that the fall of around 50% in oil prices, if sustained, could boost world growth by some 0.75% in both 2015 and 2016.
On top of this, there has been a marked loosening of monetary conditions in most developed economies since mid-2014. Long-term interest rates have fallen sharply, while numerous central banks have cut interest rates further. Meanwhile, the ECB is to begin a large quantitative easing programme next month. Obviously, a pick-up in global growth would be welcome news for the Irish economy, especially in its main export markets. Indeed it would be a double fillip for Irish exporters, as the euro has also fallen sharply since around the middle of last year, most notably against the dollar and sterling.
The Irish economy has rebounded in the past couple of years and the early indications are that it started 2015 on a strong footing. New car sales rose by 30% in January, having risen by a similar amount last year. Consumer confidence soared in January to its highest level in nine years, with most households expecting their finances to improve.
Also, the public finances have gotten off to a very strong start this year. Tax receipts were up by over 12% in January. The Exchequer finances improved by €680 million on an underlying basis in the month. The budget forecast is for a fall of €1.7bn in the Exchequer deficit in 2015. Quite clearly, if the trend in January is any way near maintained, there will be a much bigger decline in the deficit this year.
Meanwhile, the PMI surveys for services, manufacturing and construction all recorded strong readings in January, consistent with continuing rapid expansion in these sectors. The Live Register also continued its decline in January, with the jobless rate falling to 10.5%. The Irish Central Bank recently revised up its outlook for the Irish economy and is now forecasting GDP growth of 3.7% this year and 3.8% in 2016, close to our projections for growth of 4% in both years.
The Central Bank notes that some downside risks still remain, especially on the external side. Nonetheless, all the main policy levers are now supportive of growth — the exchange rate, interest rates, and fiscal policy. Our main export markets are also strengthening. Inflation has turned negative which will boost consumer spending power, while employment is rising. All in all, the recovery in the Irish economy looks to be moving on to a firmer footing.