Thursday 22 February 2018

Consumer spending surge drives faster pace of growth

Economist Gabriel Fagan
Economist Gabriel Fagan

Colm Kelpie and Paul O'Donoghue

DOMESTIC demand is now expected to make a larger contribution to growth than previously thought, the Central Bank has said, reflecting the strength of the recovery.

In its latest economic bulletin, Dame Street said the economy is expected to grow by 3.8pc this year, fractionally better than had been anticipated, and 3.7pc in 2016, fractionally less than a previous forecast.

But it warned that despite the strong recovery, the Government must continue on the path of fiscal consolidation in line with European rules, with an adjustment of at least 0.5pc of the value of the economy to try to ensure against unsustainable spending. That, the Bank said, equates to about €1bn.

It said this did not mean it believed the Government should impose further austerity in October's Budget, the last before the election, in which the coalition is expected to ease back on austerity.

The Central Bank bulletin comes ahead of Exchequer Returns due to be published later this afternoon, which are expected to show that the tax take remains better than expected, fuelling expectations the Government will be able to unveil a more generous Budget amid hopes that better than expected revenues and strong growth will help it achieve its fiscal targets.

The Central Bank said the momentum of recovery in the economy continues to build and broaden, with domestic demand now making a significant positive contribution to growth.

"While there is little change to the overall outlook for GDP growth in 2015 and 2016, as compared to the forecasts published in the last Bulletin, the composition of growth is slightly changed, with domestic demand now seen as making a stronger contribution than previously envisaged," the Central Bank said. For this year and next year, the Central Bank estimates that domestic demand is expected to grow, on average, by 3.4pc per year supported by further gains in consumer and investment spending.

"As a result, it is envisaged that GDP growth will be increasingly driven by domestic sources in coming years," the bank said. Consumer spending is expected to grow by 2.2pc this year, double the rate recorded last year.

The Central Bank is forecasting that the unemployment rate will drop to 9.8pc this year, and fall to 8.7pc in 2016.

But Central Bank chief economist Gabriel Fagan said the main message is that the Government must continue the process of fiscal consolidation, in line with European rules.

The bank estimated that this would amount to around €1bn. "That is the main point. How you implement it in terms of expenditure revenue etc, these are matters that are beyond the mandate of the Central Bank," he said.

But Mr Fagan would not be drawn on Government plans for concessions in October's budget, which include possible tax cuts. He said there is no case for fiscal stimulus to boost the economy.

While the Fiscal Council backed the Government's push for an easing of EU spending rules, the Central Bank declined to give its view.

Meanwhile, speaking to the Irish Independent at a separate event, Minister for Business Ged Nash said it was important that we are provided with an amount of flexibility while remaining compliant with the fiscal rules.

"Irish people need to be able to see the benefits of economic recovery. We are quite pleased that the Fiscal Advisory Council and the Government are at one on our approach to this [the fiscal rules].

"I think it's important that there is an amount of clarity from Europe on this before the spring statement."

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