Business Irish

Monday 17 December 2018

Economy 'exceeding expectations' - Central Bank

(Stock image)
(Stock image)

Colm Kelpie and Ellie Donnelly

THE 'Celtic Phoenix' economy is growing stronger than expected with rising wages and full employment on the horizon.

The Central Bank says the pace of the recovery has "exceeded expectations" as it predicted an extra 89,000 people will be in work by the end of next year.

This would bring the total number with a job to around 2.3 million - well ahead of the previous peak of 2.24 million seen at the end of the Celtic Tiger years in 2007.

Economic growth is being supported by strong and broad-based growth in employment, the Central Bank argued, in an upbeat assessment of the health of economy - its first this year.

This in turn is boosting incomes and encouraging people to get out and spend, it added. Other components of the domestic economy, like construction, have also grown strongly.

"The recovery has probably exceeded expectations, yes," said Mark Cassidy, the Central Bank's new director of economics and statistics.

"I think if you were to go back two or three years ago the expectation would have been for gradual economic recovery.

"But I think that the pace of that recovery in terms of economic growth, and particularly in terms of employment, has exceeded expectations, but it is exceeding expectations in a way that is sustainable."

By 2019, one person in every 16 will be employed in construction, unlike in 2007 when that was one in every seven, the Central Bank added.

The economy, in GDP terms, will grow by 4.4pc this year, the bank said, up from the 3.9pc forecast it gave in the autumn.

"Crucially, our outlook brings the prospect of full employment into view as the unemployment rate is projected to fall to just over 5pc next year. Average earnings are also expected to increase, by 3.2pc this year and 3.4pc next year," said Mr Cassidy.

He added that as unemployment gets to 5pc and below, wage pressures can escalate.

"We don't see it yet, we see a sustainable increase in wages that has been relatively moderate - but this is certainly an indicator to look out for as a measure of whether the growth is sustainable."

The Central Bank assessment comes just a week after research reveals employees' prospects are finally back on track, with jobs and pay on the up, following years of instability.

Employment agency Morgan McKinley predicted strong job creation this year, while data from the Central Statistics Office last week showed that employment was up 2.2pc, or 48,100 to 2.21 million, in 2017 to the end of September.

The peak was just under the 2.24 million recorded in the final months of 2007.

That compares with a low of 1.875 million in 2012.

The unemployment rate remained at 6.7pc over the quarter, while the number of people out of work for a year or more is now about 40pc of total unemployment. That is the lowest since the end of 2009. But the Central Bank said "real and varied" risks remain and it warned against complacency.

Brexit and its impact here loom large, as do international reforms to the corporate tax landscape.

"Brexit continues to be the big unknown in terms of future trading conditions with the UK, a vital economic partner," Mr Cassidy added.

"And with such solid growth, the risk of economic overheats - or boom and bust economic cycles - means that we continue to urge prudence in public spending in support of stable growth."

But Mr Cassidy said there was no sign at present that the economy was overheating - a view shared by Finance Minister Paschal Donohoe and Fiscal Council chairman Séamus Coffey.

"Domestically there are upside risks the potential for stronger wage growth and a risk that overheating pressures may emerge, it is important to emphasis that we do not think overheating is currently present in the economy," Mr Cassidy said.

Concerns have also been expressed, most notably by the Department of Finance, about the State's increasing reliance on corporation tax receipts.

They now account for 16pc of total tax receipts, compared with the long-run average which is 13.5pc.

About 16pc of total CT receipts are coming from companies paying less than €1m, while 36pc are coming from companies paying less than €10m.

About 64pc of receipts are coming from firms that pay more than €10m. He said the top 10 payers account for just under 40pc of all receipts.

Mr Cassidy said the Government needs to ensure that the economy and the public finances in particular would be resilient to any changes or threats to the corporate tax base.

But he added: "The tax base has become much more broad based and there is not the same reliance that we had pre crisis on various transient sources of revenue."

The Central Bank said growth will moderate to 3.9pc in 2019 - the year the UK officially leaves the EU - as the economy gets closer to full employment and growth in the State's trading partners moderates. Mr Cassidy also said shortages in housing will persist in the coming years, as will pressure on prices and rents.

Irish Independent

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