It’s fair to say that, over the past two decades, the Irish economy has been rather unpredictable. At times, the economy has roared with success. On the flip side, it is only eight years since the country had to be bailed out by the EU.
However, since the post-crash era, the Irish economy is a tale of ever-deepening strength. At the time of writing, all key financial indicators are extremely positive. The IMF loans were repaid early, saving billions in interest costs; GDP has grown by 9.1% compared with 12 months ago; the unemployment rate has reached a new pre-crash low of 5.3%; retail sales have risen by 5.9% compared with the same time last year – essentially, the picture is a very healthy one indeed.
While there is obvious cause for celebration across a range of economic indicators, some are beginning to question whether Ireland’s economy is as strong as it initially appears.
The spectre of Brexit
The Irish economy may be performing well, but it – like the rest of Europe – is currently existing in a state of suspended animation. The reason for this, of course, is Brexit.
Simply put, no one knows what is going to happen to the Irish economy, the Eurozone, or even the UK economy come March 2019. The Nordic think tank, Copenhagen Economics, recently looked at four different Brexit scenarios. None of the scenarios painted a positive picture for Ireland.
If the UK were to remain in the European Economic Area (EEA), GDP would fall by 2.8% by 2030 when compared to a “no deal” scenario. This is fairly manageable, but also – unfortunately – the least likely. The Eurosceptics in the ruling Conservative party have made it clear remaining in the EEA is not an option, and the chances of such a decision being adopted as government policy are extremely slender.
At the time of writing, the prospect of a “no deal” scenario is a very real one, with both the UK and the EU said to be preparing for such an outcome. This is troubling for the Irish economy; if the UK crashes out of the EU, and thus reverts to WTO rules on trade, Irish GDP would fall by 7% in 2030.
All of the above is undoubtedly confusing, and is greatly influenced by political rather than economic will. With little progress in the Brexit negotiations, the simple truth is that, at this point, all that can be done is to wait and see what happens.
The good news is that the Irish economy is at least approaching this certainty in fine health, which should at least mean that any damage from the nightmare “no deal” scenario can be weathered without too much harm.
The confusion in some of the numbers
While the Irish economic indicators are overwhelmingly strong, there is one potential point of concern: wage growth. While some sectors have seen decent wage growth, much of the country is still struggling. Although average weekly earnings in Q2 2018 were up by 3.3%, this is relatively weak compared to otherwise strong indications of growth elsewhere in the economy.
There is some positive news to note, however: slow wage growth has long been tied to household debt, with the two factors understandably influencing one another. While Irish household debt has been problematic for a number of years, the recent figures are rather optimistic; household debt as a proportion of household income is falling and is now at its lowest point since 2004. This suggests that the Irish growth is natural, rather than fuelled by credit, as happened in the mid-00s. This fact is undoubtedly positive news in and of itself, even if it is a little confusing in relation to wage growth.
The discrepancy between wage growth and household debt is not the only area where the numbers don’t quite seem to add up. For example, retail spending rose just 1.8% in 2017 – which is relatively low for a country experiencing a boom in GDP. While some of the reasons behind this sluggishness undoubtedly result from relatively slow wage growth, the gap is wider than many economists would expect.
What do these discrepancies mean? There are no clear, obvious conclusions at this point in time; there are theories, but nothing that can be proven. It may be a simple case of people choosing to live within their means; they are earning less, so they spend less, choosing not to rely on credit. The discrepancies may also suggest that there are other issues not yet understood; at this point, it’s difficult to say for sure.
For some economists, the rapid economic growth is concerning. The major issue for this is one of capacity – and, most particularly, the signs that much of the economy is reaching full capacity. The industrial sector is using nearly 10% more in terms of resources than they were previously, there has been talk of a housing crisis for some years now, and even governmental operations – such as driving test applications – are struggling to cope with demand.
Some have theorized that while the economy is racing ahead, these capacity issues may indicate the country is struggling to keep pace. When growth has been so rapid, there is always the risk that the scope for further growth is greatly impeded.
The threat of full employment
A low unemployment rate is undeniably a positive, but Ireland’s unemployment rate is reaching a worrying point – and, again, it’s linked to capacity. It is expected that unemployment will fall below 5% in 2019, and perhaps as low as 4.5% – which is the point the country is thought to have reached “full employment”.
In these circumstances, competition for employees between businesses will become fierce. The inevitable consequence of this is wage growth, as companies seek to attract the best and the brightest to their organisations. If wage growth were to suddenly correct, and perhaps even boom, this could influence other economic indicators. Some of these would likely be positive – for example, retail spending – but others may be negative, with the potential for companies being forced to pay more than they can realistically afford.
In truth, it is difficult to reach a conclusion on this issue. It is undeniable that the Irish economy is performing well. There are some underlying concerns, but this is not unusual. On a similar note, Brexit could cause severe harm, or it could be manageable.
As a result, there is no particular way of knowing for sure just how robust the Irish economy actually is – but we do know that come March 2019, its strength will definitely be put to the test.