12 minute read 9 Dec 2019
12 economic predictions 2020 in ireland's christmas list

What’s on Ireland’s Christmas list? 12 economic predictions for 2020

By

Neil Gibson

Ernst & Young — Ireland (EY Ireland) Chief Economist

Economic advisor. Media commentary and advisory supporter.

12 minute read 9 Dec 2019

Christmas is a time to reflect and look ahead. In that spirit, here are our 12 predictions for the Irish economy in 2020. Spoiler alert –  we underestimated just how well Ireland would perform in 2019!

It’s Christmas, and we all know what that means; mulled wine, candles, mistletoe, turkey sandwiches and family-induced cabin fever! While some things ‘are’ predictable, the economy is not one of them, certain aspects remain more volatile than grandad after too many sherries. All joking aside, forecasting is always challenging, especially in a relatively small and open economy like Ireland, but at the end of each year, we as economists are duty bound to look back at the past year and set out some predictions for the one ahead. While current media headlines can often make sobering reading, these predictions are based on the numbers that really matter from housing and employment to construction and beyond. 

So how did we do last year, and what does 2020 hold for the Irish economy?

2020 is expected to be another strong year for the Irish economy, assuming the avoidance of a hard Brexit (admittedly a rather important assumption!). The labour market is expected to slow modestly as supply tightens and wage costs encourage employers to explore other options. Nevertheless, GDP growth of 3.2%, 40,000 net jobs created and a 4% rise in tax receipts would be performance that most other economies would love to achieve. This will make for a positive economic climate in what will be an election year but, as evidenced by elections throughout the world in recent years, there is more to contentment levels of citizens than GDP and job growth. The fact that Ireland is only just into budget surplus territory - despite its extremely strong rates of growth and still has a €175bn debt mountain - is a sobering  backdrop for 2020 that tempers the generally upbeat forecasts somewhat.

2020 will begin with the Irish economy in rude health and the forecast is for another strong year, moderated only slightly by factors outside of Ireland’s control or costs resulting from its long run of fast growth. We know that the often-quoted phrase ‘it’s the economy, stupid!’ is no longer valid. Civic society looks for much more when reflecting on its levels of happiness. As a result, just like many children across the country are finding out, Ireland’s Christmas list will have to be prioritised and we will not get everything we might have hoped for in 2020
Professor Neil Gibson,
Chief Economist, EY Ireland

Forecasting is a difficult exercise and reviewing past forecasting performance can be a stressful experience! However, it is important to review what was predicted and understand why it did not come to pass to help improve our future forecasting. Of our 12 predictions made a year ago, seven appear broadly on track (full year 2019 data is not available yet) and, of the five that appear off course, four are due to the Irish economy performing better than expected. Only house prices appear to have come in lower than forecast a year ago, and that is not necessarily a bad thing when thinking about affordability for buyers. GDP is a tricky indicator to forecast in Ireland due to a number of distortionary factors. With data in for the first half of 2019, our forecast of 4.2% growth may prove a little conservative. 

Most surprising of the 2019 outturns have been the very high tax receipts and sustained low inflation (which is good news for consumers). It is possible that the low inflation experienced in most developed economies is partly a result of technological advances, allowing for more competition and cost control - a research topic for 2020 perhaps.  

Forecasting is part art and part science. Models are helpful, but they are poor at predicting inflection points and cannot build in the shocks that are part and parcel of the world in which we live. Looking back to last year, our forecasts underpredicted Irish performance in a few areas, though labour market predictions were largely on the mark. The end of year school report therefore reads – good effort, but there are areas for greater focus in 2020
Professor Neil Gibson,
Chief Economist, EY Ireland

The predictions

GDP: +3.2%

Strength in the domestic economy resulting from a combination of job growth, real wage growth and government spending is projected to compensate for weakening global conditions. GDP is expected to be above trend at 3.2% in 2020. Modified domestic demand, which strips out the main distortions in Irish GDP, is forecast to grow at a similar rate (3.1%). Ireland will, therefore, remain near the top of the European growth charts.

How did we do last year? Too low. GDP is likely to exceed our 4.2% forecast for 2019.

Employment: +1.7%

Job growth is expected to remain robust in 2020 with 40,000 net jobs projected, a slight reduction on the 56,000 enjoyed in 2019, as tightening labour supply, rising wages and slower global growth take their toll. Consumer and government spending will boost domestic businesses and strong migration will allow firms to keep recruiting.

How did we do last year? On track.

Unemployment rate: 4.6%

Unemployment has been falling steadily for seven years since its peak of over 15%. Employers are finding it harder to find labour, though even at the 4.6% rate projected for 2020, we are still some way off having full employment. The steady flow of migration and demographic factors mean that the strong job forecasts will not translate into an equivalent fall in unemployment. Nevertheless, we project it will continue to fall to its lowest rate since 2005.

How did we do last year? On track.

Wage Growth: +3.5%

Wage Growth has picked up over the last 18 months as labour supply tightens and skills gaps emerge in key sectors. The growth is also partly compositional with more hiring at senior level, pushing up the overall average wage. Overall average wages are projected to slip back very slightly from their 2019 level to 3.5% in 2020.

How did we do last year? On track.

Consumer spending: +2.4%

Despite signs of ebbing confidence in consumer surveys, the rate of job and wage growth should support a healthy 2.4% growth in consumer spending in 2020. With the national savings rate at a healthy level and confidence largely restored in the property markets, fears over Brexit and the global economy appear to be only having a modest effect on consumer behaviour.

How did we do last year? On track.

Migration: +40,000

Ireland remains a very open economy with fluid labour movements both in and out of the country. Net migration is projected to reach 40,000 in 2020 with Ireland’s economic strength and improved relative attractiveness as an English-speaking, cosmopolitan location further boosting inflows. This flow will continue to drive demand in the economy, but will add to the pressure on public services and infrastructure.

How did we do last year? Broadly on track - the prediction of 40,000 for 2019 may prove slightly too high, estimates suggest 34,000 in the year to June.

Inflation: +1.6%

This is one of the great economic puzzles – how has inflation remained so low? With rising wages and a strong economy, most economic models would forecast a rise in headline inflation. A depreciation in Sterling has helped keep Irish inflation down, but high levels of competition may also have mitigated against firms increasing their prices. It may also reflect the application of new technology and data analytics as cost control measures. The twin conditions of healthy job/wage growth and low inflation has made it a very strong 18 months for domestic businesses.

How did we do last year? Too high – inflation is expected to be under 1% for 2019, lower than our 1.8% prediction last year.

Construction inflation: +7%

Reflecting the strong overall economy, construction continues to perform well with domestic and commercial demand remaining strong. In addition, increased levels of government capital spending are providing a further boost and, consequently, inflation in the sector is very high. Cooling global conditions may take some heat out of the input and materials prices but wages look set to increase.

How did we do last year? On track.

House prices: +3.2%

House price growth has slowed markedly in the last 12 months. Unusually, this is in not in response to a weakening economy, but partly a reflection of the lending rules that have placed a harder ceiling on borrowing. This has been a welcome outturn for the Irish economy overall, though it has not been helpful in accelerating the development of much needed additional housing supply. Our forecast is for prices to pick up slightly from the current growth rates, reflecting demand and affordability in the wider economy.

How did we do last year? Too high – our 4% prediction is likely to be above the final figure which is set to be c.2.5%.

Housing completions: +24,000

Despite net migration of 34,000 into Ireland in the year to mid-2019 and a long-standing stock shortage, housing completion levels remain well below the required level. A moderation in house price growth, opportunities elsewhere in the construction sector and a challenging planning and regulation environment continue to work against a more marked acceleration in house building. Fortunately, the constrained supply has not resulted in an unwelcome sharp pick-up in prices.

How did we do last year? Too high – completions will fall short of our 25,000 predicted, perhaps ending the year at around 21,000.

Tax receipts: +4%

Tax receipts have been very robust across all major categories. Though corporation tax increases have made the headlines, income tax and VAT have also grown strongly - reflecting the broad-based economic growth underway in Ireland.  It remains hard to predict tax receipts as Ireland’s fortunes have considerable exposure to a very small number of firms, but the forecast for continued job growth and wage increases mean a very healthy 4% is our central forecast for 2020.

How did we do last year? Too low - our forecast of 3.8% is likely to prove well short of the outturn which is more likely to be in the 6-7% range.

Government balance: 0.1% of GDP

The Irish economy being back into general government surplus is both a cause for celebration and concern. The €175bn debt mountain remains almost untouched despite the sustained period of fast growth, making the rather cautious Budget set by the Minister for Finance, a rarity before an election, which is both understandable and advisable. The forecast of a very modest surplus next year reflects uncertainty over the volatile corporation tax receipts and the long list of calls on government budgets across most areas of public service.

How did we do last year? Broadly on track – crucially, we projected a small shortfall of 0.1% not a surplus of 0.2% so although the error was relatively small, symbolically a modest surplus feels very different to a modest deficit.

Summary

2020 is expected to be another strong year for the Irish economy, assuming the avoidance of a hard Brexit. The labour market is expected to slow modestly, nevertheless GDP growth of 3.2%, 40,000 net jobs created and a 4% rise in tax receipts would be performance that most other economies would love to achieve. Ireland’s high levels of public debt, despite a sustained period of strong economic growth perhaps tempers the optimism.

About this article

By

Neil Gibson

Ernst & Young — Ireland (EY Ireland) Chief Economist

Economic advisor. Media commentary and advisory supporter.