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Central Bank revises 2016 growth upwards

Regulator says strong growth in domestic demand will push GDP growth up to 5.1% this year

The Central Bank has revised its growth forecast upwards for the Irish economy for 2016, and is now predicting growth of 5.1 per cent, up from 4.8 per cent previously, “on the back of exceptionally strong rates of growth in domestic demand”. However, it warned that Ireland’s economic recovery is “not complete” as it forecasts “marginally lower growth” for 2017.

Overall the outlook for the Irish economy remains “broadly favourable” the Central Bank said in its quarterly accounts for the second quarter of the year. It is forecasting gross domestic product (GDP) growth of 5.1 per cent for 2016, up by 0.3 per cent from its prior forecast, and 4.2 per cent for 2017, down from 4.4 per cent previously, as it says that domestic demand is now firmly the main driver of expansion.

Chief economist, Gabriel Fagan said: “The growth outlook is relatively favourable and domestic economic momentum is strong, although there are some risks to the outlook from external factors. The main driver of growth will be the continuing recovery in employment and incomes, although following its very strong growth in recent years, employment growth is projected to gradually moderate over the forecast horizon.”

Export growth is also set to remain favourable in 2016 and 2017,although it noted that the impact of this on overall economic growth is projected to be largely offset by continued strong growth in imports.

Risk factors

While the economic outlook may be “relatively favourable”, the Central Bank also noted risks to the downside, including levels of public and private sector debt levels, which remain high.

As such, there is a “strong case for precautionary behaviour and prudence” Mr Fagan said, wich would allow the government to build up a buffer should adverse circumstances arise.

“It would be desirable and advisable to build up more buffers,” he said.

Wage growth was also cited by the Central Bank as a potential risk, as it warned that while there may be some recovery in wage growth ”it is important that that this process does not lead to overshooting”.

“While gaining momentum, Ireland’s economic recovery is not complete. Lasting improvements in productivity and competitiveness would boost Ireland’s growth potential and support sustainable employment growth into the future,” the Central Bank said.

Political uncertainty at home may also be an issue. Five weeks after the general election, and with no sight of a new government, Mr Fagan said so far this political uncertainty has not had a negative effect. However, he warned that “protracted uncertainty could lead to an adverse impact”.

Brexit

On the external front, the regulator notes that emerging market concerns as well as broader geo-political factors are potential issues, as is the forthcoming Brexit referendum on whether or not the UK will stay in the EU, which “creates uncertainty and is a downside risk factor”.

“It is unambiguous that it would be negative,” Mr Fagan said, but added that the question is how negative it would be, and this would depend on how the relationship between Britain and the rest of the EU is constructed post-exit.

A “creditless” recovery

Pointing to household debt figures, the Central Bank notes that gross new lending increased in 2015 with households drawing down € 4.4 billion in new mortgage loans. However, it added that the figures also reveal that “a significant degree of deleveraging” is still underway among Irish households , as they continue to reduce their overall debt levels. This ongoing decline might suggest that the economic recovery has, to date, been somewhat “creditless” the Central Bank says.

However Mr Fagan noted that it’s difficult to interpret the decline in credit as constraining growth, given the stellar economic growth figures of last year.r”.

Article Source: http://tinyurl.com/kbwqb42

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