Year ahead: positive signs in Irish economy but risks looming in Europe

Will 2015 be the year when people start to “feel” the economic recovery?

Entering the new year, the signs are that the economy has growth momentum, though recent protests and opinion polls show that the Government is not getting any credit.

Most forecasters expect further growth in 2015, with a good chance of the unemployment Live Register falling back below 10 per cent. Disposable incomes may start to rise for more people but all the indications are that the return of consumer confidence will be gradual.

It will be fascinating to see how this plays out politically as the general election approaches and how the Government parties but also Fianna Fáil and Sinn Féin play it, and whatever group of Independents may emerge.

If the Coalition believes the economic recovery will continue, then surely it will try to stick together until 2016, or at least until late next year. Battered in the polls after a disastrous run – culminating in Irish Water – Fine Gael and Labour have an incentive to hold on, if there is the hope that the recovery will build.

If the economic tide turns and it looks unlikely that there will be money from Ministers Michael Noonan and Brendan Howlin to give away on budget day next October, then the calculation will change.

In that scenario, an early general election would look much more likely.

Huge influence

Growth in the Irish economy is difficult to forecast. International trends have a huge influence and the data itself can be heavily influenced by the way multinationals conduct their business.

GDP looks to have grown by about 5 per cent this year, though calculations by the Fiscal Advisory Council suggest multinational activity inflated this a bit.

Even so, if “real” growth, adjusted for this, was closer to three per cent, it is still a strong performance.

Recent months have brought evidence that the recovery has widened, with export growth, an increase in investment and higher spending in some areas by consumers, though no statistical evidence yet of an overall rise in consumer expenditure.

Lower oil prices and continued low interest rates should help heading into 2015.

There are, of course, risks. Ireland has managed okay with UK and US growth strong and weak growth in the euro zone. However if the weak euro zone performance turned into a prolonged slump, it would affect export growth.

Meanwhile, further market nerves about the euro cannot be ruled out – Greece is heading for a snap general election, Italy remains stuck in a loop of high debt and low growth and the Russian crisis is hitting exports from Germany and the other central euro zone economies.

A frisson of nervousness will have gone through the Government at the third-quarter GDP figures which – while they showed an annual increase of 3.5 per cent – indicated no growth from the second quarter. This seems out of line with other data; tax returns remain strong, the Live Register is falling and consumer and business sentiment indicators are broadly positive.

But the Government needs the economy to enter 2015 gathering pace. The indicators in the first few months will be key. Watch out for tax data from the first quarter, as an early signal, together with the monthly Live Register, an imperfect but useful sign of the jobs market.

On target

The numbers in 2015 will be tighter than in recent years.

Coming out of the bust, the Government left itself a lot of room for manoeuvre and was sure to beat its targets. The 2015 budget, however, needs growth to remain reasonably strong to bring everything in on target and, crucially, to leave some leeway for 2016.

The international trends to watch centre on interest rates and central banks. In the US, interest rates may start to rise. What will this mean for growth and financial markets, both in the US and across the world?

In the UK, rates may remain on hold but, as in the US, the next move will be up. Despite it being election year, more cuts and higher taxes are on the cars.

In Europe, the crunch issue will be whether European Central Bank president Mario Draghi finally has to put his money where his mouth is and effectively flush large amounts of extra cash into the euro zone economy to try to boost growth and inflation.

These international trends will go a long way to dictating the pitch on which the domestic political game will be played. Much of the debate looks set to be around the old questions of where tax should be levied and how it should be spent. Mixed in with this is how to deal with our historic national debt burden.

And, as we have seen in recent years, voters will also respond to who they believe they can trust to manage things. The Government’s hope is that the recovery will change this calculation as the year goes on. By the end of the first quarter, we should have a good indication of whether the economy is still delivering.

How this will play with voters is, of course, another question entirely.