Should we be worried, or is the all-island economy still booming?
Heightened risk driving more job growth
Firms are busy, job growth is rapid, real wages are increasing and access to talent is cited as the number one business concern. Yet, the economics fraternity is very concerned. Talk of overheating, impending slow-downs and downside risks seems at odds with many of the data points.
Economists and business leaders diverge
This apparent contradiction is not unique to Ireland. According to EY’s Global Capital Confidence Barometer, 93% of firms see the global economy as improving. However, the early 2019 macroeconomic data points to signs of weakness. Global forecasts have been revised downwards with continuing trade wars and sectoral disruption adversely impacting the outlook. Generally, strong job creation, low inflation and interest rates globally have bolstered domestic economies.
Labour market leads to modest upward revision in ROI
These forecasts are little changed from last quarter’s report with Republic of Ireland (ROI) growth modestly higher at 4.1% in 2019 and 3.3% in 2020. Northern Ireland (NI) forecast growth has been revised upwards to 1.1% for 2019, though UK forecasts are downgraded to 1.3% due to Brexit effects on investment and problems in the automotive sector. The upward revision in ROI is mainly due to positive quarter one jobs data with a further 20,600 net jobs created, resulting in over 81,000 net jobs in the year to Q1. NI employment rose by 1.7% (14,700 workforce jobs) in the year to Q1 2019, and we project modest growth for 2019 as a delayed Brexit and the associated paused investment postpones the modest contraction in employment to 2020.
Is inflation beginning to pick up?
In a tight labour market, economic theory suggests that pay increases should accelerate. After a long period of stagnation, that is beginning to occur. Both jurisdictions are experiencing overall wage increases above the rate of inflation (3.6% and 3.1% projected in 2019 for ROI and NI respectively). Although not expected to be a growing trend of accelerating wage demands, it should put upward pressure on inflation and increase business costs. Our forecasts expect a more rapid pick up in ROI inflation than most other forecasters (1.7% and 2.3% in 2019 and 2020 respectively), which in turn will slightly arrest growth in consumer spending.
How would the island cope with a ‘bad’ Brexit?
The Irish economy appears strong enough to avoid outright recession on the back of a ‘bad’ Brexit in which tariffs apply, though it would be very damaging for particular locations and sectors. EY’s Europe Attractiveness Survey shows significant pick up in ROI Foreign Direct Investment (FDI) (52% increase in 2018), a major component of which is an acceleration of British FDI into ROI. This concurs with our EY Financial Services Brexit Tracker which places Dublin as the most attractive destination for Financial Services moving from London. A global slowdown presents a much greater threat to ROI headline GDP growth than Brexit. NI’s growth is weaker and without a relocation boost, would likely be pushed into recession.