Irish economy: Sunshine and showers

Official projections for the Irish economy have been revised down in recent months. The Central Bank of Ireland, Department of Finance and the Economic & Social Research Institute all cut their forecasts to c. 4% gross domestic product (GDP) growth in 2019, which is below the Davy forecasts for 5% GDP growth. The standoff between the US and China on tariffs, the slowdown in European manufacturing, and Brexit uncertainty were all cited as factors that might limit Ireland’s expansion this year.

However, there is precious little sign that Ireland’s expansion is starting to slow. Employment grew by an enormous 3.7% in the year to Q1 2019, with the unemployment rate falling to a fresh low of 4.6%. Core retail sales (excluding volatile motor trades) expanded by c. 6% in the first four months of 2019. The public finances remain in rude health with tax revenues up c. 6%, including a 7% rise in income taxes.

Ireland still shows strength

One concern had been that Brexit uncertainty might lead Irish households to rein in spending. Indeed, consumer surveys have shown that Irish consumer confidence fell to a four-year low in February. However, within these surveys questions on ‘current conditions’ or household’s financial situation showed little deterioration. So, it isn’t surprising that consumer spending has accelerated in 2019, buoyed by tax cuts and robust employment.

The extent of the slowdown in the European economy remains uncertain. Indicators such as the Purchasing Manager's Index (PMI) surveys paint a bleak outlook, but the rise of GDP in Euro area by 0.4% in Q1 2019 was far better than expected.

It is clear Irish exports have performed well so far this year. In the first quarter, Irish nominal goods exports were up 12% on the year. The defensive nature of Irish exports, concentrated in agri-food, chemicals, medical technology – rather than the production of capital goods – is helping to protect the export sector from the slowdown in European manufacturing.

Brexit continues to hang in the balance

Perhaps the recent key development has been the six-month extension of Article 50 – pushing out Brexit to 31st October. Our consistent view that a ‘fudge’ would be found to keep the UK inside the European Union (EU) single market has been borne out – so, for now, the risk of a ‘no-deal’ Brexit involving World Trade Organization (WTO) tariffs and the sudden elimination of the legal/regulatory basis for UK-EU trade has been negated.

Unfortunately, the Conservative leadership contest was replete with anti-EU rhetoric and threats to leave the EU with no-deal. Boris Johnson has pledged that he would seek to leave the EU on 31st October, whatever the circumstances, if successful in his bid to become prime minister.

However, it is worth remembering that the UK parliament has already voted against ‘no-deal’ under any circumstances. Also, John Bercow’s decision to stay on in his role means parliament will have a speaker determined to ensure its voice is heard. Once again, we expect the most likely outcome to be another Article 50 extension on 31st October.