The ESRI's recent quarterly economic commentary (QEC) suggests that the Irish economy will continue to recover in a robust manner.
At 5pc, the increase in Irish output levels in 2014 was the largest across the euro area and based on likely international and domestic trends, we believe the economy will grow in 2015 by approximately 4pc, with a further increase of 3.5pc likely in 2016. However, it is useful to put this performance in context. Total output in the economy will only be back to its pre-financial crisis peak in 2007 at the end of 2016 - nine years later. Indeed, one of the reasons why we are experiencing such strong rates of growth at present is because the Irish economy was so badly affected by the post 2007/08 economic downturn.
At the outset of the recovery, our improving performance was very much an export-led story. This can be attributed to the improvement in competitiveness which occurred in the Irish economy after 2007/08 and the strong growth experienced by key export markets such as the US and the UK. More recently, the declining value of the euro, in anticipation of the quantitative easing programme launched by the European Central Bank (ECB), has also been highly beneficial.
Over the past year, domestic investment has also contributed to the recovery, increasing considerably, albeit from a very low base. Consumption is both harder to understand and to forecast at present, mainly because the financial crisis has left Irish households continuing to carry particularly high levels of debt, mainly although not exclusively property-related. Many of these households are now paying down some of these debts. This process sees many households unable to increase their expenditure on goods and services while they have significant debts to clear. As a result, we expect to see modest increases in consumption over the next year.
Improvements in the economy appear most tangible to the general public when employment rises and unemployment falls. While unemployment rates are still quite high at 10pc, a significant number of jobs (approximately 70,000) have been created in the Irish economy over the past 18 months. It is worth noting that the number of jobs created by IDA supported firms is somewhere around the 10,000 mark over this period, indicating that a sizeable number of the jobs created have been in Irish-owned firms; this is a welcome fact not widely acknowledged. Given the overall improvements in economic activity, we expect to see the unemployment rate fall below 9pc this year and 8pc next year, for the first time since 2008.
What about the risks to the economy? The housing market remains a major challenge for the economy. For the second month running we have seen a fall in national house prices - surely a good development in light of the rapid increases in prices observed last year? Well, unfortunately it's not that simple. The central problem in the housing market right now is the low supply of new housing. Last year we built 11,000 units, but according to detailed micro-level research by colleagues in the ESRI, we need approximately 25,000 units per annum to meet the underlying demand. The reality is that we may need house prices to rise some more to generate the required increase in supply.
It is in that context that we voiced some concern about the timing of the recent macro-prudential measures introduced by the Central Bank of Ireland. These measures may result in lower house prices, fewer houses being supplied and lower levels of mortgage credit being extended than would otherwise be the case. Given that the housing market is still in recovery mode from the dramatic 2007-2012 collapse, we argue that now is not the time for such a significant intervention.
In joint research published last week, Professor Karl Whelan of UCD and I conducted a detailed assessment of future long-term growth prospects for the euro area - it does not make for happy reading. Not only is Europe still struggling to emerge from the recent global downturn, it faces major longer-run problems. These arise because the proportion of its population in the key working age category (15-64) is set to decline considerably over the medium term. This, we demonstrate, is negatively impacting on growth prospects for the euro area right now. Additionally, labour productivity was on a long downward trend in Europe even before the impact of the financial crisis. Both these factors are likely to see Europe struggling to experience significant growth rates over the medium-term. This points to the importance of Ireland's global diversification of its export markets.
Kieran McQuinn is an Associate Research Professor at the Economic and Social Research Institute (ESRI), and Adjunct Professor of Economics at UCC. Previously he worked for the Central Bank and Teagasc