A ‘year of two halves’ for the economy, says Investec

It will be a “ year of two halves” for the economy, according to a new report from Investec, though the worst of the immediate pressure after the Brexit vote may have passed. The pace of expansion of the Irish economy dipped sharply after the Brexit vote, the reports says, but Investec analysts Philip O’Sullivan and Ronan Dunphy are broadly confident about the economic outlook, forecasting gross domestic product (GDP) growth of 4 per cent this year, easing to 3.4 per cent next year.

While the economy took a hit after the Brexit vote, Investec says recent indicators show that “ the worst of the pressure has passed”. It points out that in October the purchasing managers’ index (PMI) for manufacturing and construction showed their fastest pace of expansion for four months and seven months respectively. While growth in services has eased, the sector is expanding.

The economy is being driven forward by domestic demand, as opposed to export growth, Investec says, and while there has been evidence of growth moderating in the second half of the year, indicators such as employment, housing completions and retail sales “all point to still-healthy momentum”. As a result Investec has trimmed its 2017 and 2018 GDP growth forecasts by 0.1 of a percentage point each to 3.4 per cent and 3.2 per cent respectively.

Labour market

“The strength of the labour market remains one of the stand-out features,” the bank says, with total employment expanding by 2.9 per cent annually and now up 11.8 per cent from its lowest level during the economic crash. The environment for the Irish consumer “remains buoyant”, it says, and 2017 should be another good year for the retail sector, even if the positive outlook here is “ not without risks”.

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Next year will also be a challenging year for the public finances, Investec says, with some signs of a slowdown in tax revenue growth and emerging demands for a faster pace of increase in public sector pay.