ESRI doubles 2018 growth forecast for Irish economy

The ESRI has doubled its growth forecast for the Irish economy for this year to almost 9 per cent, with growth being propelled by the twin engines of stronger-than-expected consumer spending on the domestic front, and a more favourable trade balance due to a decline in imports on the multinational side.

This will position the State as the fastest-growing economy in the euro zone this year. However, despite the upgrade, the ESRI also cautioned against an inflationary budget, and warned that its forecasts are based on an assumption that a Brexit deal will be struck by March 2019.

In its latest quarterly economic commentary, the Economic and Social Research Institute (ESRI) has forecast GDP growth of 8.9 per cent for 2018, followed by growth of 4.5 per cent for 2019. This compares with a GDP growth forecast of 4.7 per cent for 2018 and 3.9 per cent for 2019 given by the ESRI in June. Unemployment will fall to 5.7 per cent this year, and to 5.1 per cent in 2019, the ESRI has also said, slightly higher figures than its June forecasts (5.6 per cent and 5 per cent respectively).

The influential think tank said it had upgraded its GDP forecasts due to two main factors: firstly, consumer spending, on the back of falling unemployment and increasing disposable incomes, and modified investment, such as that in the construction space, have grown at a faster pace through the first half of 2018 than was previously expected.

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Secondly, a decline in imports of research and technology-related services from the multinational sector has led to a sizeable improvement in the trade balance.

“Consequently, our forecast for GDP has increased significantly,” the ESRI said.

However, with the scope of the UK's departure from the European Union still unclear, as a Brexit deal has yet to be finalised, it does add a sizeable caveat.

“Our forecasts for 2019 are subject to the technical assumption that an agreement along the lines of the European Economic Area will exist between the UK and the EU after March 2019,” the research institute said, adding that the economy faces a “substantial risk” from the possible outcome of the Brexit negotiations. While the ESRI said that the upcoming summit of EU leaders in October may provide some clarity, “at this stage it is prudent to assume that a no-deal outcome is a real possibility”.

It was also open to the idea of a 'holding budget', which would look to neither inflate nor deflate the economy

With a debt to GNI* (gross national income) ratio in excess of 100 per cent, the ESRI also warned that the Irish economy is still “quite vulnerable to any significant changes in the financing costs of sovereign debt”.

Budget 2019

With less than two weeks now to go to Budget 2019 on October 9th, the ESRI said the Government should spend neither too much nor too little, and the most " prudent policy" would be to run budgetary surpluses and reduce the level of indebtedness.

“This would provide buffers to withstand future economic shocks,” it said, given the possibility of a highly adverse shock such as a no-deal Brexit, or international trade tensions. However, given the need for investment in areas like housing, it said it was also open to the idea of a “holding budget”, which would look to neither inflate nor deflate the economy.

“Undertaking such investment can add to the productive capacity of the economy, and reduce the increase in housing costs which presently pose a significant challenge to domestic competitiveness,” the ESRI said.

It also warned that opting for an “explicitly contractionary budget”, at a time when the risk of a no-deal Brexit outcome was quite high, could “ reinforce the shock on the economy rather than insulate it” in that eventuality.

SMEs

The ESRI also published new research by the institute and the Department of Finance which shows that eight-in-10 Irish SMEs invested in fixed or other assets in 2016. Using new survey data, compiled to address knowledge gaps around the investment activity of small Irish companies, the research shows that while more than half of Irish SMEs have invested in fixed assets such as buildings or machinery, only 7 per cent of SMEs reported investing in intangible assets, such as R&D and patents.