OECD Economic Outlook, Volume 2019 Issue 1

Ireland

Economic growth is projected to remain robust, but to ease gradually to 3.9% in 2019 and 3.3% in 2020. Abstracting from the volatile activities of multinational enterprises (MNEs), underlying domestic demand growth will remain solid, supported by strong construction investment. Equipment investment growth will moderate somewhat amid ongoing uncertainty around the Irish economy, notably that related to the Brexit process. As the unemployment rate has fallen to historically low levels, job growth will moderate but wage pressures will remain strong, feeding into higher inflation.

The improvement in the fiscal position is expected to slow in the near term. The government should remain committed to improving the public finances, but it should stand ready to mitigate disruptive consequences if significant risks materialise, such as a disorderly conclusion of the Brexit negotiations. As property prices have recovered strongly over the past years, the property tax yield should be raised through more regular revaluations of the base, which would also help rationalise property purchase demand.

The strong expansion continues

Underlying domestic demand grew by around 4.5% in 2018. Solid consumption has been driven by strong gains in employment and income. With the unemployment rate having declined rapidly, wage growth has already become strong. However, inflation remains muted, pulled down by lower import costs. Both consumption and equipment investment have weakened over the past few quarters, while consumer confidence and business sentiment declined since early 2019, on the back of high external uncertainty. In contrast, construction activity has kept momentum, reflected in strong growth in planning permissions and completions. Although new housing completions have been catching up with demand, there will continue to be shortages in the dwelling stock for some time.

Wages and construction activity: Ireland

Source: Central Statistics Office Ireland; and OECD Economic Outlook 105 database.

Statlink

Ireland: Demand, output and prices

Statlink

Policies should aim at ensuring sustainability

The improvement in the structural fiscal position is likely to weaken over the next two years. The authorities are planning to increase public investment by EUR 116 billion (36.4% of 2018 GDP) over the next ten years as part of the National Development Plan, with a focus on public transport, housing, education and skills. By addressing business constraints, including skills shortages, the plan will raise growth potential and living standards over the medium-term. Public debt as a share of measured underlying economic activity remains still very high and the plan should be implemented conditional on pursuing the target of further reducing public debt and focus exclusively on projects with the highest social returns. The government is planning to reduce income tax for low-income households and has recently abolished regressive VAT rate exemptions for the hospitality sector. These measures will improve social inclusiveness and are positive, in net terms, for government revenues. To further improve the fiscal position, the government should eliminate expenditure overruns, which have been significant in some sectors, notably in health, over the past years.

Property prices remain high, despite having moderated recently, both in the housing and commercial property sectors. The authorities strengthened macroprudential measures last year, tightening the application of loan‑to‑income ratios and announcing the imposition of an extra capital buffer from July 2019, which is appropriate. Foreign investors account for more than half of commercial property investment in Ireland. They often obtain funding from outside the Irish banking sector, but they still leave the Irish property market vulnerable to rapid changes in prices, and open up new channels for the transmission of external shocks.

The economy faces capacity constraints and uncertainties

Output will expand at a more moderate pace over the next two years due to increasing capacity constraints, especially in the construction sector, and weaker external conditions, especially for manufacturers. The unemployment rate will continue to fall to historically very low levels, albeit at a more moderate pace. As a result, wage pressures will remain significant, translating into higher prices given weak productivity growth.

Uncertainties to the outlook are significant. The most immediate one is a disorderly conclusion of Brexit negotiations, which could plunge the Irish economy into a recession. Changes in the international tax regime could affect FDI decisions by multinational firms, posing a significant risk for Ireland. Property prices may strongly surge again, which would further boost construction activity in the near term but may lay the foundation for another boom-and-bust cycle if associated with another surge in credit growth.