EY Economic Eye: Steady GDP and employment growth place Ireland’s economy in rude health ahead of Brexit

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EY Economic Eye: Steady GDP and employment growth place Ireland’s economy in rude health ahead of Brexit

Ireland’s growth forecast for 2019 has been marginally revised downwards in the face of a weaker global growth outlook, however with the domestic economy continuing to perform well, the country approaches this challenge and the possibility of a “no deal” Brexit from a position of considerable strength. That’s according to the latest EY Economic Eye forecast published today by the professional and consultancy services firm.

  • ROI GDP growth forecast sees a modest uptick for 2018 to 8.3% and a slight downward revision for 2019 and 2020, reflecting a weaker global outlook
  • Employment growth set to continue, with 56,600 net additional jobs forecast for 2019 and 194,000 by 2024 assuming a smooth Brexit transition
  • Construction sector will see the greatest jobs boost however further investment will be needed to reach Ireland’s ambitious infrastructure plans
  • EY outlines second weaker scenario for Ireland based on a no deal outcome

EY projects GDP growth of 8.3% for the full year 2018, 3.9% in 2019 and 3.2% in 2020. Whilst this is a modest downward revision for 2019 and 2020 (from 4.4% and 4.0% in November) it is considerably higher than that expected from the UK. The forecast projects that Northern Ireland’s economy will have grown modestly in 2018 at 1.5%, slightly ahead of the UK (1.4%), however the region is set to experience much slower growth than the Republic of Ireland and the UK in 2019 and 2020, at 0.9% and 1.2% respectively. These forecasts are predicated on UK and EU trading conditions remaining unchanged over the forecast period due to the adoption of a transition agreement.

Commenting on the report, Professor Neil Gibson, Chief Economist for EY Ireland said, “Forecasting on the eve of Brexit is particularly challenging, and although our base case is still for strong growth in the Republic of Ireland and more modest growth in Northern Ireland, the downside risks have increased since our last forecast. The risks to Ireland’s economy are mostly external, whereas Northern Ireland faces greater internal risks due to less favourable consumer and government conditions. However, whilst the possibility of a very challenging 2019 cannot be dismissed, the good news is that the island faces these challenges from a position of relative strength.”

According to the forecast, Ireland will also benefit from 56,600 net additional jobs in 2019 and 44,100 in 2020, which will be required to support the country’s ambitious growth plans. This is reflected in EY’s sectoral analysis which shows that the construction sector will see the greatest number of new jobs generated by 2024 (39,100). Meanwhile, wage increases for 2019 are set to average 3.6% in 2019, reflecting a tightening labour market. With low headline inflation, people should feel this in their pockets, further boosting the domestic economy.

Neil Gibson says, “The need for infrastructure spend across the island is clear, and increasingly widely accepted. However, the construction sector, which will deliver and maintain this infrastructure, does not always attract the necessary attention. With demand booming and prices rising fast, the scars left by the recession still linger and have left the sector smaller and less convinced that spending will continue in tougher times that may lie ahead. To ensure growth can be supported, there needs to be a long term commitment to spending to allow firms to invest accordingly. Construction is more than a support for growth, it lays the foundation.”

Within this edition of Economic Eye, in addition to its regular forecast EY outlines a second scenario for Ireland’s economy based on its latest Brexit forecasting model. This weaker scenario paints a picture of the likely outcome for Ireland if the country endured a fractious no-deal Brexit period. The results of this exercise produce a marked slowdown in GDP growth in the Republic of Ireland, to 2.5% and 1.4% in 2019 and 2020 respectively. Across the island, it would mean a reduction of 3.0% in GDP in 2020. Labour market reactions would be more muted, with Ireland’s employment growth falling by 1.2% or 28,000 jobs in 2020. This is a slightly less severe downturn than predicted in the recently published Department of Finance estimates.

This second scenario also suggests that Northern Ireland could endure a period of recession, as the trade impacts and additional costs to consumers and businesses hit the already modest growth in the central case. The projected fall in Sterling adversely impacts on consumers through increased imported inflation which is a key factor in the forecast.

Neil Gibson comments, “Modelling a no-deal outcome is challenging given the complexity of how the economy will react. Currencies will adjust, and spending by governments, consumers and businesses will be impacted in ways that recent history tells us are hard to predict. Given the current strength of the Irish economy there are sectors that would eagerly absorb any labour that becomes available and there may also be increased movement of economic activity from the UK to Ireland. Our estimates of a no-deal impact are therefore damaging, but Ireland’s economy is at least in good health as it faces into this problem.”

Focusing on the here and now and ongoing uncertainty over the precise nature of Brexit on 29 March, the immediacy of needing sufficient talent to meet current demand, coupled with worries over lagging global growth and skittish stock markets mean that there are plenty of challenges to face on the island of Ireland.

Looking at the potential impact of Brexit on businesses across the island of Ireland, Michael Hall, Head of Markets for EY Ireland says, “Brexit dominates the headlines but for many firms the pressure to meet orders and staff their businesses feels even more urgent. Encouragingly, in the case of the Republic of Ireland, our analysis shows that the overall health of the economy means that it is well placed to face the challenges ahead. Furthermore, unlike in Northern Ireland, there is financial capacity for the Irish Government to intervene and support particular sectors that may need transitional help in the event of an adverse Brexit. We are seeing more innovative solutions to the risks ahead, with firms diversifying and looking increasingly closely at what rapidly evolving technology offerings can provide.”

Article Published: 04/02/2019