Opinion

Wednesday 12 December 2018

No leprechauns behind this pot of gold as the economy surges ahead

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Donal O'Donovan

Donal O'Donovan

The leprechauns are not to blame this time, the experts insist. That's despite our economy displaying surging growth three times faster than even the rapidly recovering euro area.

The pace of Irish growth was 7.3pc last year, measured in terms of gross domestic product (GDP), the European Commission said.

This number matters because official EU figures are used to assess the size of Ireland's national debt, to determine our contribution to EU budgets, and as a benchmark to measure spending under the so-called Fiscal Rules.

Even stripping out the multinational effect, the Commission sees domestic growth was up 4.9pc, double the average in the euro area.

Investec Ireland's chief economist, Philip O'Sullivan, said the higher pace of growth could mean flexibility to add "a couple of hundred million euro" to Budget spending under EU rules, though cautioned against using the wriggle room.

The data suggests little or no impact on the real economy as a result of Brexit or of currency fluctuations linked to the impending UK exit from the EU.

Growth this year will be a still exceptionally strong 4.4pc, according to Brussels.

In fact, the pace of Irish growth in 2017 is closer to what economists expect to see in developing nations and will inevitably raise fears of "leprechaun economics", a shorthand for distortions caused by the presence of multinationals here.

"There's certainly a gloss to the numbers from the multinational sector, but it's not huge," said Mr O'Sullivan.

"The number of new IDA jobs last year was 20,000, which saw us double the 2007 figure," he said.

The tax take was 6pc higher last year than in 2016, while retail sales - excluding cars - were up 7pc.

Data from manufacturing, construction and services all show a strong pace of growth, he said.

Household net worth in the Republic is now just 1pc less than in 2007, and household debt is significantly lower.

That all points to very strong domestic demand, according to Mr O'Sullivan.

The EU data points to domestic rather than exports driving growth, something that's generally a worry for the Irish economy, however.

"Consumer spending and construction investment are forecast to drive GDP growth in the short term. Strong employment growth, particularly for full-time jobs, should underpin a rise in disposable income and household consumption over the next two years," the commission said.

Support from various Government policies means investment in construction - residential and commercial - is projected to further contribute substantially to the economic expansion, the Commission said.

The EU figures are well ahead of the Department of Finance here, and make Ireland the fastest-growing EU member for the fourth year in a row.

Mr O'Sullivan said he thinks Ireland could move to a Budget surplus this year, but that "wriggle room" to ramp up Government spending should be ignored.

"Strong growth does provide wriggle room down the line to relax Government spending, but it would be prudent not to use it."

The commission also thinks the euro-area economy as a whole will expand faster than previously anticipated this year and next.

The commission said growth in the region is more balanced than at any time since the financial crisis, and as the UK teeters on the brink of a potential Brexit-induced contraction that is positive for Ireland. The euro area is Ireland's biggest export market.

The 2.3pc growth projected for 2018 is up from 2.1pc forecast in November and close to the decade-high rate of 2.4pc.

However, in a timely fashion in light of this week's market wobbles, the commission warned of the "potential of a sharp correction in financial markets".

There's already been a taste of that, with bonds and stocks hit by a global rout in the past week on concern about inflation and tighter monetary policy.

Yesterday saw a small rebound in European stocks, but a sustained slump could damage confidence and global growth.

EU Economic Affairs Commissioner Pierre Moscovici said the expansion is strong and he's not worried about the impact of the sell-off on the economy.

He added: "I hope it's not famous last words."

Irish Independent

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