15 minute read 27 Sep 2019
Economic Eye Summer forecast 2019

Economic Eye Summer forecast 2019

By

Neil Gibson

Ernst & Young — Ireland (EY Ireland) Chief Economist

Economic advisor. Media commentary and advisory supporter.

15 minute read 27 Sep 2019

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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.  

Executive summary 

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.  

  2019 2020 2021 2022 2023
ROI 4.1%  3.3% 3.2%  2.9%   2.8%
ROI MDD* 4.1%   3.6%  3.3%  3.0% 2.8%
NI 1.1%    1.2% 1.6%  1.6% 1.9%
UK 1.3%    1.5% 1.8% 1.9%  2.0%
Source: EY Economic Eye, UK ITEM Club
* Modified domestic demand excludes trade and removes the impacts of IP relocation and aircraft leasing, giving a more accurate picture of the domestic economy
(Chapter breaker)
1

Chapter 1

Global outlook

Mixed global growth amid political instability

Global growth forecasts are being revised down for 2019/2020, impacted by uncertainty from escalating trade tensions and geopolitical instability. Countries such as Australia and India are responding by cutting interest rates, while the ECB ruled out a rate increase and signalled it would act as appropriate if signs of a slowdown became more pronounced. The US Fed stated it will “act as appropriate” to sustain labour market expansion and achieve its target inflation rate of 2%. Euro area growth of 0.4% in Q1 2019 continued 24 quarters of growth and was coupled with the lowest unemployment since 2008. The consumer and services sectors are performing well, with lower inflation boosting spending. 

By contrast, recent data shows manufacturing slowing down, particularly in Germany, affected by disruption in the auto industry, slower Chinese demand and the threat of US tariffs on imported cars. European FDI remains high, but declined by 4% in 2018 for the first time in six years according to EY’s Attractiveness Survey. A decline of 13% in FDI projects for both the UK and German markets led to the overall decline, but large increases in Italy (+63%), Ireland (+52%), Poland (+38%) and Spain (+32%) delivered welcome news. Only 27% of companies surveyed, a seven-year low, plan to grow operations in Europe over the next year. Brexit has become the number one risks affecting Europe’s attractiveness in the next three years, followed by political instability and a rise in populist and protectionist sentiment.  

Trade tensions weigh heavily on the global outlook. The latest US tariffs on Chinese imports will cost the average American household $831 annually, according to the Fed[1]. The threat and subsequent postponement of new tariffs on Mexican imports and the end of preferential trade with India and Turkey highlight the volatile nature of current trade negotiations. This further adds to the burden on consumers and hampers employment and investment decisions for businesses.

The latest Global Capital Confidence Barometer shows a growing disconnect between the confidence of executives and the outlook of economic forecasters. Despite growing uncertainty, there has been a boardroom shift in 2019 towards seizing the opportunities it affords. 87% of respondents predict improving corporate earnings in 2019, a rise of 10 percentage points on last year’s survey. The forecast for a slowdown in US growth in 2020 is a particular risk for the ROI economy. Coupled with weak growth in the UK, German and French markets, the external conditions are projected to become more challenging. The ability to reach new markets will be important and it is encouraging that a number of large markets are expected to improve in 2020, including India, Brazil and Canada. The externally-focused nature of the ROI economy increases the importance of tracking growth in key markets.  According to the OECD, “while growth was synchronised eighteen months ago, divergence has emerged between sectors and countries depending on their exposure to trade tensions, the strength of fiscal responses and policy uncertainties.” [2] 

[1] New China Tariffs Increase Costs to U.S. Households, May 2019
[2] Laurence Boone, OECD Chief Economist, Global Economic Outlook, May 2019
Global growth forecasts (OECD)
  2019 2020
US 2.8% 2.3%
China 6.2% 6.0%
Japan 0.7% 0.6%
Germany 0.7% 1.2%
UK* 1.2% 1.0%
India 7.2% 7.4%
France 1.3% 1.3%
Italy 0.0% 0.6%
Brazil 1.4% 2.3%
Canada 1.3% 2.0%
Euro area 1.2% 1.4%
World 3.2% 3.4%

Source: OECD Economic Outlook, Real GDP growth, May 2019 * UK ITEM Club forecasts UK growth of 1.3% in 2019 and 1.5% in 2020

Summary

Talk of overheating, impending slow-downs and downside risks seems at odds with many of the data points. Should we be worried, or is the all-island economy still booming?

About this article

By

Neil Gibson

Ernst & Young — Ireland (EY Ireland) Chief Economist

Economic advisor. Media commentary and advisory supporter.