OECD Economic Outlook, Volume 2018 Issue 1

Ireland

Economic activity in Ireland is projected to remain robust, but to ease gradually. Abstracting from volatile activities of multinational enterprises (MNEs), domestic demand will remain robust with solid employment growth and consumption. As the labour market tightens, wage pressures will be strong, feeding into higher inflation. Business investment will slow after its strong rebound, while the construction sector will retain its momentum.

The stance of fiscal policy will be mildly contractionary in both 2018 and 2019. The government should remain committed to improving the fiscal position, thus making room to use fiscal policy against potential negative shocks, notably that of Brexit. The implementation of a new development plan aiming at economic, environmental and social progress should be conditional on this commitment to improve the fiscal position, requiring projects to be carefully prioritised.

Strong expansion continues

Underlying domestic demand grew by 3.9% in 2017 and remains solid, underpinned by employment growth, supporting private spending. With the unemployment rate having declined rapidly, wage pressures have risen. In contrast, inflation remains low, largely thanks to the appreciation of the euro against the pound sterling. An improvement in business conditions is widely spread across sectors, but activities are visibly stronger in some sectors, notably, construction.

Some signs of over-heating are emerging

The property market is buoyant, as house prices and construction investment are rising strongly. Notwithstanding high bank lending rates, new mortgage loans and SME loans (largely driven by construction‑related ones) are increasing sharply, albeit from a very low base. Macro‑prudential policy tools currently in place, such as the loan‑to‑value and loan‑to‑income caps, have reduced the share of risky loans, and should be extended if necessary.

Ireland

Source: Eurostat; Central Statistics Office; and Central Bank of Ireland.

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Fiscal policy is projected to be mildly contractionary in 2018 and 2019. Given uncertainties to the outlook, the government should remain committed to improving the fiscal position, thus leaving room to use fiscal policy to support growth if needed, in particular, against a potentially strong negative impact of Brexit at the end of the transition period in 2021. The authorities are planning to increase public investment further with the National Development Plan, amounting to EUR 116 billion over the next 10 years. The Plan should be implemented conditional on pursuing the target of further reducing public debt, ensuring that only those projects that are cost‑effective are implemented. This will benefit fiscal sustainability, while avoiding over‑heating the economy.

Ireland. Demand, output and prices

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Despite strong growth, employment ratios remain low by historical standards. The government should assess up‑skilling and re‑skilling programmes provided by SOLAS, a government agency, and expand those that are effective and wind down those that are not. This will help the long‑term unemployed return to work, while alleviating cost pressures in the labour market.

The economy will face capacity constraints and uncertainties

The economy will grow robustly, though gradually at a more moderate pace. Firms are projected to expand at a slower pace due to high labour costs and high external uncertainty, including the final outcome of the Brexit negotiations. With the effects of the pound sterling depreciation dissipating and wage pressures feeding through, inflation is projected to rise strongly. Risks to the outlook are elevated, the most immediate one being Brexit. Property prices may increase more strongly, which would boost further construction activity in the near term but may induce another property bubble associated with a strong surge in credit growth. Persistently high private indebtedness also poses a downside risk, as it leaves the economy sensitive to rising interest rates.