Page 22 - Linkline Autumn 2016

Economy to Continue on Robust Growth Path
Philip O’Sullivan
Notwithstanding the softer international backdrop, Ireland’s economy should still turn in robust underlying growth.
We recently refreshed our forecasts for the Irish economy in the wake of the Brexit vote and the release of Q1 national accounts data for Ireland. At a headline level, we now see GDP expanding by 4.8% in 2016 and by 3.5% next year. These forecasts represent downgrades of 20bps and 50bps respectively to our previous expectations, reflecting greater caution around export and investment growth in a post-Brexit world, which is partly offset by
a stronger consumer profile as Irish labour market data continue to impress.
The latest national accounts data attracted global attention as the statistical reclassifications relating to the treatment of inversion deals involving multinationals, purchases by aircraft leasing firms and companies relocating intangible assets to Ireland all combined to produce GDP growth of 26.3% in 2015, more than three times the rate of expansion (+7.8%) that was originally estimated when preliminary FY15 figures were released back in March. The useful- ness of the national accounts in terms of taking the temperature of Ireland’s economy is clearly open to debate, but a host of other data – government tax receipts (+10.5% in 2015), retail sales volumes (+8.2% in 2015) and total employment (+2.6% in 2015) confirm that underlying growth has been very healthy indeed. The latest data confirm that these positive underlying trends continued into 2016. Tax receipts increased by 9.2% y/y in H116, retail sales volumes were +5.3% y/y in June 2016 and employment rose 2.4% y/y in Q116.
As a small open economy Ireland is not immune to international headwinds. The recent deterioration in the UK’s prospects is clearly unhelpful in this regard, but it is worth noting that five-sixths of Irish exports go to markets other than the country’s next door neighbour. Another point is that exports are skewed towards areas that we would expect to be relatively resilient, even in more uncertain times, e.g. pharmaceuticals, software and food.
Under the official national accounts methodology, exports and imports both enjoyed a blockbuster 2015, increasing by a remark- able 34.4% and 21.7% respectively. Other CSO releases provide clues on the real level of activity, with statistics of port traffic revealing a 6.7% increase in the total volume of goods handled by Irish ports
in 2015, while industrial production data show that the volume of production in the ‘modern’ (multinational) sector rose 23.5% in 2015, while the ‘traditional’ (indigenous) sector’s volumes rose 5.1%. So, while we believe that there was solid growth in activity in underly- ing trade in 2015, the headline national accounts figures have an artificial feel to them. For this year we see export growth of 4.0%, moderating to 3.0% next year.
What does Brexit mean for Ireland? While the UK remains a major trading partner for Ireland, its relative importance has declined over the past few decades. At the time (January 1973) that Ireland joined the then European Economic Community, some 58% of merchan- dise exports went over the border into Northern Ireland or across the Irish Sea to Britain. Last year only 14% of merchandise exports went to Ireland’s next door neighbour (in addition, c. 20% of services exports went to the UK). In the short-term, the weak sterling is a headwind for many Irish exporters. Longer-term, with the ultimate impact of Brexit on Ireland will be determined by arrangements struck between the UK and the rump-EU.
Ireland’s success in diversifying its export markets helps to mitigate the headline impact of any UK-specific weakness on Ireland (generally speaking, every 1pc hit to UK GDP knocks Irish GDP by roughly 0.2pc relative to baseline). The benefit of this diversification is perhaps best illustrated by the fact that after the UK vote the
old Irish punt (holding it at the fixed conversion factor at which Ireland joined the euro in 1999) appreciated to approximately the same level against the British pound that it had reached after Black Wednesday in 1992, when the UK accounted for more than twice as high a share of Irish goods exports than it does today.
Turning to the domestic economy, we think that the labour market and consumer spending will remain sources of good news this year, notwithstanding the more unsettled backdrop.
On the former, the total number of people at work in Ireland has increased by 9% since the Q312 trough, while the unemployment rate currently stands at its lowest level in eight years. While the em- ployment components of the Investec PMIs for Ireland suggest that the rate at which employers are adding to headcounts has slowed in recent months, we still expect to see payrolls advance at a healthy clip this year – indeed, the total number of people at work here is likely to breach two million for the first time since the ‘Celtic Tiger’ period in the near future.
There are good reasons to believe that consumer spending will do well this year. Buoyed by the strengthening labour market condi- tions outlined above, the ‘wealth effect’ from significantly improved household balance sheets, elevated consumer confidence and the boost from falling taxes on incomes, the retail sector in Ireland has experienced a solid period of growth. CSO data show that retail sales have posted 32 successive months of annual growth in both value and volume terms, with particularly strong momentum seen in consumer discretionary areas such as car sales.
In all, our sense is that 2016 will prove to be a year of two halves for Ireland. As outlined above, high frequency indicators show a strong performance in the opening six months of the year. Towards the end of the half there were signs of emerging softness, with the headline Investec Manufacturing PMI falling to its lowest since July 2013 in May, while in the previous month the headline Investec Services
PMI softened to its weakest outturn since February 2014, although both remain above the 50 ‘no change’ line separating growth from contraction. Post the UK’s EU referendum, we fear that further weak- ening is inevitable. Notwithstanding this moderation, and barring any more statistical anomalies, the Irish economy is still likely to turn in some of the strongest growth in the European Union in both this year and the next.
Philip O’Sullivan is Head of Macro-Financial Research at Investec Ireland.
22 The CharTered InsTITuTe of LogIsTICs & TransporT
ECONOMIC GROWTH