Oliver Mangan Chief Economist at AIB discusses reasons to be optimistic about the state of the Irish economy in our latest blog.

Reasons to be optimistic on the state of the Irish economy

Reasons to be optimistic on the state of the Irish economy

The National Accounts data for 2014 released by the CSO last week showed the economy expanded 4.8% on a GDP basis and 5.2% on a GNP basis last year as the recovery in activity gathered momentum writes Oliver Mangan Chief Economist at AIB

The GNP figure compares with the growth rates of 3.3% and 1.1% registered in 2013 and 2012. The figures also show that Ireland was the strongest growing EU economy last year. The rise in our GDP compares with growth of 0.9% for the eurozone and 2.6% in the UK in 2014. Two key reasons why the economy is able to grow strongly are its very large export base and the fact that many domestic sectors are rebounding from a very low base. What was particularly encouraging last year was that the recovery spread to the domestic sector of the economy. Domestic spending rose by close to 3%, having contracted steadily for the previous six years.

 

The domestic recovery has been led by a rebound in investment. Business spending on machinery and equipment rose over 30% last year, with new house building increasing by 26%. These are strong growth rates but they are off a very low base. Meanwhile, growth in non-residential construction activity was much more modest last year at about 4%. Consumer spending also picked up in 2014, especially in the second half of the year.

 

For the year as a whole, consumer spending rose 1.1%. Car sales were particularly strong, as was retail spending, but expenditure on services continued to decline. Exports performed strongly last year, with service exports rising by 8%, thanks to a strong performance by computer and business services. There was a rebound in pharmaceutical exports, while most encouraging was the good performance by many so-called traditional manufacturing sectors. Output from the indigenous sectors of industry rose 6.8% last year.

 

The strong performance in external trade was reflected in yet a further rise in the balance of payments surplus last year. It climbed to €11.5bn from €7.6bn in 2013. All the data released so far for 2015 suggest that the strong performance of the economy in 2014 has continued into this year. Most notable has been the strength of tax receipts across all the main revenue categories in the opening two months of 2015.

 

Consumer confidence, retail sales and car sales figures suggest the pick-up evident in consumer spending last year is being sustained. Rising employment and some signs of wage growth augur well for consumer spending, as does the sharp fall in oil prices.Meanwhile, on the external front, the sharp fall of the euro, in particular against the dollar and sterling, will provide a boost to the traded sector of the economy. Exports should also be boosted by signs of stronger growth in mainland Europe.

 

It is important that growth is well balanced as then it should prove more sustainable. In this regard, there is need for a significant rise in construction output, particularly new housing, from its still depressed levels to ease upward pressure on prices and rents. Most commentators, including ourselves, have been predicting the economy would increase around 4% in 2015 and 2016. The recent trends though, suggest that the balance of risk to these forecasts is now to the upside and growth may well exceed 4% in the next couple of years.

 

One major beneficiary of stronger-than-expected growth will be the public finances. Already, after only two months of the year, it seems clear that the budget deficit target of 2.7% of GDP will be undershot. Indeed, the deficit is likely to be closer to 1% than 3% of GDP this year. This would open up the prospect of quite a stimulatory budget for 2016, adding further to the upward momentum.

 

Source: Irish Examiner March 17th 2016

You are signed in as:null
No comments yet
<< BACK TO BLOGS