OECD Economic Outlook, Volume 2019 Issue 2

Ireland

On the assumption of a “smooth” Brexit, GDP growth in Ireland is projected to remain robust, though moderating. Abstracting from multinationals’ volatile activities, underlying domestic demand will remain resilient, supported by strong construction investment and despite the toll taken by slower trade partner growth and high external uncertainty on business sentiment. The labour market will tighten, and the associated wage pressures will push up inflation.

Fiscal restraint has been needed to avoid overheating and to build buffers in the face of risks, including those related to the Brexit negotiation. The government plans to deploy a significant fiscal package in the event of shocks related to Brexit, while letting the automatic stabilisers fully operate.

Underlying growth momentum has slowed but remains solid

Total domestic demand, adjusted for volatile activities of multinational enterprises, continued to grow at a solid pace of around 3% in mid‑2019, following very strong expansion over the preceding years. Business sentiment has declined since early 2019, on the back of the higher risk of a ‘disorderly’ Brexit. Equipment investment has stalled over recent months, but construction activity has kept its momentum and industrial production remains resilient. The unemployment rate has reached historically low levels, and wage growth has gained further momentum recently. In contrast, inflation remains moderate, pulled down by lower import costs. Consumption is robust, underpinned by strong gains in employment and income as well as improved net worth, notwithstanding weakened consumer confidence over the past few months.

Labour market and confidence: Ireland

1. The series are normalised using their long-term average and standard deviation.

Source: OECD Economic Outlook 106 database; and European Commission, Economic Sentiment Indicator.

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Ireland: Demand, output and prices

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Fostering resilience is key

The recent improvement in public finances largely reflects strong cyclical conditions, while public debt as a share of measured underlying economic activity remains high, calling for continued fiscal prudence. The government has been ramping up public investment as part of Project Ireland 2040, which has supported construction activity over the past year. The plan should be implemented conditional on pursuing the target of further reducing public debt, with the focus exclusively on projects with the highest social returns, while avoiding fuelling the risk of overheating. At the same time, the government should contain expenditure overruns, which have been significant in some sectors, notably in health.

While labour market conditions have tightened, labour force participation remains low by historical standards, despite government tax and benefit reforms aimed at boosting it. The authorities should enhance up‑skilling and re‑skilling programmes to help the inactive population return to work. In particular, an emphasis on training in digital skills is important, given the shortages of such skills in some sectors.

Growth prospects hinge on the outcome of the Brexit negotiations

Output will expand at a more moderate pace over the next two years due to increasing capacity constraints and weaker external conditions, including the slowdown in Europe. The unemployment rate will continue to fall to historically very low levels, albeit more slowly, with wage pressures becoming intense. As firms pass higher wages partially to prices, competitiveness and profitability will deteriorate, given weak productivity growth.

Uncertainty related to the Brexit negotiation remains high, including the content of an eventual trade deal, while the risk of a ‘disorderly’ Brexit is not completely eliminated. Similarly, further protectionist trade policies adopted elsewhere could have a substantial and abrupt effect on the Irish economy, given its openness to global trade. Such shocks could also worsen global financial conditions and push down domestic property prices, as some domestic asset classes, such as commercial real estate and non‑performing loans, are particularly reliant on foreign investors. In contrast, if uncertainties associated with Brexit were to fade faster than anticipated, confidence would be boosted, strengthening economic activity more than currently projected.