Tuesday 27 June 2017

Dáil deadlock is now a risk to our economy

Goodbody warns impasse will have a 'negative impact'

Dermot O'Leary, Goodbody
Dermot O'Leary, Goodbody
Donal O'Donovan

Donal O'Donovan

The deadlock in forming a government risks jeopardising Ireland's economic recovery, a hard-hitting report warns today.

The situation is especially dangerous because public investment is already running at a record-low level.

As talks on the next government meander on, Goodbody stockbrokers are warning that political complacency must end.

So far, markets have shrugged off the political deadlock, as was demonstrated last week when Ireland issued a record-breaking 100-year bond on the markets at an interest rate of just 2.35pc a year.

But that situation will not last, according to the new report by Dermot O'Leary and Juliet Tennant of Goodbody.

This echoes growing concerns in Spain, where, after three months without a government, the state can still borrow cheaply on the markets - but the political stalemate is chipping away at the country's economic revival, undermining consumer and business confidence and raising the chances of a slowdown.

Uncertainty

Lingering political uncertainty has the potential to impact upon ongoing economic expansion here too, according to the Goodbody analysis.

"A vacuum exists when important policy initiatives in the areas of housing, infrastructure and health need to be addressed," said Dermot O'Leary, Goodbody's chief economist.

Lack of public investment is already at a low level and without a new administration to bring forward initiatives and drive policy, it is identified as a key concern.

"We believe a renewed focus should be placed upon capital spending, which, despite recent announcements, will remain worryingly low over the coming years," Mr O'Leary said.

The warning from Goodbody, one of the country's biggest stockbroking firms, comes despite the fact that the economy here continues to grow at the fastest pace in the eurozone.

Last week, the Central Bank revised up its forecast for growth in the Irish economy to 5.1pc for this year. Central Bank chief economist Gabriel Fagan said that up to now the economy had not been impacted by the political deadlock.

Investors are distinguishing between the current "political uncertainty" and the risk of "policy uncertainty", he said.

In that view, policy uncertainty, which might spook investors, is the greater risk - but that would only arise if it looked like a radical change of direction was on the cards.

However, in his assessment, Dermot O'Leary said the lack of a stable administration could see that confidence start to unravel.

"The economy is self-sustaining for now, but the absence of a governing coalition at a time when the State needs to manage its limited fiscal space prudently could start to have a negative impact soon," warns the report.

Along with the Central Bank, Goodbody does not expect a radical change of direction if or when a new government is formed because both Fine Gael and Fianna Fail will stick to European "fiscal rules" that mean a tight rein on any budget increases.

Vacuum

"From a policy viewpoint, we do not believe there will be a major shift when a new government is formed. However, at the current time, a policy vacuum exists," Goodbody said - but that only heightens the importance of spending decisions that can be made.

Targeted investment in capital projects that boost infrastructure should be the priority, according to the report.

It said current spending levels were exceptionally low, partly because the outgoing Fine Gael/Labour coalition made "unwise choices" by increasing child benefit and social welfare bonuses, rather than spending the money on housing, water and other pressing items.

The longer the current stalemate goes on, the bigger the risks to the economy, Goodbody warns. Its analysts see an unstable minority government as now the most likely result of the General Election, which means any problems are set to persist.

For the year ahead, Goodbody thinks economic growth will slow to 5pc, but that this will be almost entirely down to the more jobs-intensive domestic economy.

Growth was officially 7.8pc in 2015, but most experts believe the true figure was closer to 4pc.

Irish Independent

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