The Central Bank this morning published its latest quarterly economic bulletin, in which it lowered its growth forecast for the Irish economy this year to 4.5 per cent.
What we learned from the Central Bank’s report:
The bank does not yet seem convinced by recent reassuring figures from the British economy in the wake of the Brexit vote. After lowering its Irish economic forecasts in July as a result of the referendum, it made no further changes this time, but warned that the potential for ‘adverse effects’ from Brexit-related economic, financial or currency factors could resurface at any time.
Spending easing off
Though the bank says the economy is still growing at a healthy pace, it is seeing a slight slowdown in growth in the domestic economy. Although it says this is marginal, it points out that consumer spending grew strongly in the first quarter of this year, but actually fell in the second quarter when seasonal variations were taken into account. The bank also says that spending was weaker than other figures – such as retail sales and car sales – have indicated.
2016 boosts to fade
It expects slower growth in the economy next year, due to a slowdown in jobs growth and the fading of some factors which have boosted spending this year – including lower energy prices and a stronger euro. It also believes the impact of Brexit on consumers will become more apparent next year.
The 'Lepronomics' question
The bank is concerned about the fall-out from revised CSO figures published earlier this year which showed growth of 26 per cent in Ireland last year – mainly due to the activities of multi-national companies. In particular, it seems to be worried that governments may use such figures to justify increased spending. It warns that such measurements make it difficult to forecast tax revenues, adding that some of the extra money from surging corporation tax revenues in recent years may not always be available.
The bank is more optimistic that the economy will keep creating jobs. It says employment growth has been stronger than it expected so far this year and has increased its forecast to 2.7 per cent growth for the full year. But the unemployment rate will fall more slowly as more people enter the workforce and more people enter the country seeking work.
Debt still a risk for households
Household debt levels are falling – down 27 per cent from peak levels – but are still high relative to other countries. This, the bank says, leaves Irish households vulnerable to sudden changes in house prices and interest rates.
British link still strong
A model used by the Central Bank illustrates the importance of the British economy to Ireland. It shows that a 1 per cent fall in British GDP results in a 0.33 per cent drop in Irish GDP over a year – a much bigger fall than would be seen in the euro zone in general. But other shocks – such as a rise in US interest rates – are not so important to the Irish economy.
Consumers are starting to borrow for spending on big-ticket items again. The bank’s research shows that a pick-up in consumer credit in recent months tracks increases in spending on items such as cars, furniture and electrical goods. A pick-up in credit card spending, on the other hand, is mainly due to higher spending on services such as accommodation.