Economic Eye. Spring update. March 2018

Transcription

1 Economic Eye Spring update March 2018

2 All-island overview An improving global outlook and impressive rate of job creation offer encouragement, though headline economic performance continues to diverge. A positive global outlook provides a favourable backdrop to face impending challenges Irish growth forecasts have been revised upwards on the back of strong quarterly data. The labour market continues to expand and many firms are now dealing with the challenges this rapid growth brings. Finding, acquiring and retaining talent, coupled with rising property costs are competing with Brexit concerns at the top of the corporate agenda. Slower growth in Northern Ireland continues, as domestic pressures partially offset improved export performance. Michael Hall Head of Markets, EY Ireland The Q3 GDP data for ROI has led to a significant upgrade to the 2017 growth forecast (now 6.7%). The short-term forecast has also been revised up slightly, reflecting the overwhelmingly positive Irish data since our main Economic Eye Winter Forecast in December The UK revisions are more modest with a very small upward revision to 2017 and only minor changes thereafter. Consequently, our NI forecasts are similar to last quarter. Global conditions play a major part in the upward revision of the all-island forecasts. Global growth is strong, with early 2018 data suggesting the IMF s 3.5% projected growth estimate may prove to be conservative. All major economies are growing and monetary policy is slowly moving away from its unprecedented period of effectively zero real interest rates in the US and the UK. Although European interest rates are not projected to rise this year, late 2018 must now at least be a possibility with each successive quarter of positive data. The positive global backdrop has helped exporters across the island at a time when the appreciation of the euro has exerted pressure. Northern Irish exporters have benefited from a weaker currency, bringing with it a flow of tourists and cross-border shoppers. The divergence in labour market performance is not as pronounced as the wide GDP contrast between ROI and NI. The island added 51,800 jobs in the year to Q and unemployment has continued to fall steadily in both jurisdictions. The February data shows the unemployment rate at its lowest levels since 2008, in both ROI at 6% and NI, at its joint lowest rate of 3.9%.The issue of labour shortages is becoming more prominent, with very modest signs of pay rises creeping upwards. The contrasting inflation story on the island makes pay agreements for all-island employers very complex. A 3% pay increase in ROI is a healthy raise, but it is barely a pay rise at all in NI. With strong global growth, commodity prices may remain robust, thereby holding up inflation. Against an uncertain backdrop, it remains to be seen how willing employers will be to agree inflation busting pay deals. 1 Economic Eye Spring Update 2018

3 It has been a big quarter for the Repubilc of Ireland in policy terms, with the publication of the long-awaited National Development Plan and National Planning Framework. Both eagerly anticipated, they will be very important documents in the economic landscape over the next decade (see page 4). Sadly in Northern Ireland, at the moment, there remains no devolved Executive. Despite some optimism in recent weeks, there has not been sufficient progress on a range of complex issues to restore devolution. Regrettably, a Northern Irish voice in the Brexit negotiations remains absent. Looking ahead, the next quarter will see the final 2017 data filter through, allowing for a full annual assessment and more clarity should emerge relating to the future trade agreement between the UK and the EU. Signals on property prices in ROI remain crucial indicators to watch, as do migration levels. In NI, focus should be given to the overall labour market and whether it continues to expand, or will domestic pressures bring the slowdown predicted in the Winter Economic Eye outlook. March 2018 Michael Hall Head of Markets, EY Ireland Professor Neil Gibson Chief Economist, EY Ireland Economic Eye Spring Update

4 1Economic outlook Global conditions boost Ireland Headline growth forecasts EY growth forecasts ROI 6.7% 4.5% 3.8% 3.6% 3.4% NI 1.6% 1.2% 1.5% 1.7% 2.0% UK 1.8% 1.7% 1.7% 1.9% 2.0% Source: NI/ROI: EY Economic Eye, UK: EY ITEM Club ROI growth forecasts for 2017 have been revised upwards from under 5% to close to 7%. The short-term outlook remains positive, remaining over 3.5% until was a record year for Irish goods exports, boosted by healthy global demand. Exports reached 122bn, the highest annual total on record, an increase of 2.8bn (2.3%) on 2016 Wage growth remains muted, although signs of an uptick are evident in the Q data which recorded the fastest annual growth (2.5%) since the crash. Overall inflation remains low at 0.2%, equating to rising real wages and consumer spending power These real wage increases, coupled with the growing population (growth of over 1m people is predicted by 2040) and substantially more people in work provides a boost to consumer businesses in Ireland, contributing to the strong growth story The Government s new strategic vision in the form of the National Development Plan and Ireland 2040 provides a new policy framework designed to facilitate continued growth and mitigate against these competitiveness pressures NI forecast growth is similar to the Winter Economic Eye forecasts, projected 1.2% for 2018, boosted by the increased cross-border trade and tourism that favourable exchange rates have facilitated. However, consumer spending power and confidence may falter if inflation continues to climb and outstrip pay growth The UK is forecast to grow by 1.7% in 2018 and 2019, slower than the other major economies. Brexit uncertainty and a squeeze on spending power hold back growth, though the improvements in productivity estimates in the recent data and export potential in a growing world economy provide some upsides Brexit remains a key focus across the island, but its effects remain unclear. Given ROI s fast growth rates, there is a risk of complacency in Brexit preparation among firms. EY s Economic Eye forecasts assume a transition deal and free trade, or close to free trade thereafter House prices and rents, however, remain competitiveness concerns. They have the potential to negatively impact Ireland s attractiveness for firms looking for a European base post Brexit. House price growth was 12.3% in the year to December 2017, while rents grew by 10.4% in the same period according to to the Irish Rental Price Report Q issued by Daft.ie 3 Economic Eye Spring Update 2018

5 Looking long Government sets out Ireland s future Launched in February, the National Development Plan and National Planning Framework provide a strategic context under which Ireland s economy should develop in the decade ahead and beyond to There is much to like in the documents, with a positivity of tone and a recognition of the wider societal factors that impact economic outcomes clearly set out. Environmental concerns, social inclusion, rural communities, culture, technology and quality of public services all feature in the National Strategic Outcomes. There are, of course, areas in which the documents will provoke debate, but these should not distract from the positive contribution they will make. Points to consider are: Timing The nature of the crash and EU policy dictated that investment strategy in Ireland will be pro-cyclical, not counter-cyclical and with that comes the risks of industry capacity and price increases. These risks are heightened given the positive prospects for private sector investment in building and construction, as the economy and population continue to expand. That said, the need for investment is clear and the challenge will be mitigating the risks and ensuring that capital investment levels do not fluctuate to the extent that they have in the past. A clear long-term strategic framework highlighting the importance of adequate infrastructure is to be welcomed. The Government should focus on early wins while acknowledging that some of the investment ambitions contained in the documents will have longer lead times. Public support Considerable public consultation took place. However, recent election and referenda votes across the world point out that the public may not be fully on board with a strategy of more people/ more jobs/more wealth if it detrimentally impacts on their standard of living and drives property prices and rents up further. Public opinion needs to be monitored when implementing economic policy going forward to ensure that key economic priorities do not lack the necessary public support. Frequently, particular types of investment need to be evidenced in a specific way to ensure full understanding of the need for, and the benefit of public investment. Prioritisation Naturally, strategy documents cannot be too precise, they have many mouths to feed. Words like strengthen, supporting, encouraging, sustainable and enhanced are words that appear frequently in the documents. However, in places greater use of quantified evidence to demonstrate why particular projects made the short list and others did not, would have been helpful. Careful prioritisation of what to do and in which order to ensure maximum impact will be necessary, particularly in a dynamic economy that will continue to evolve during the plan s lifecycle. Partnerships The role of the private sector is alluded to, but not drawn out, the focus instead is on the public sector programme. There is a significant investment backlog which will require new funding models and the need for private investment to work in partnership with the public sector. Accuracy of population forecasts Unusually, the National Planning Framework starts with a very specific statement: In the next twenty years we will grow by an extra one million people. In a country in which net migration has swung from +105k to -30k in just a few years, there is clearly a wide range of possible outcomes. An acceptance of this uncertainty might have facilitated a framework for adjusting the pace and direction of the plan as new data emerges. Important framework: Now for delivery The Government are to be congratulated on pulling the strategic framework together and hopefully it will both stimulate healthy debate and act as an excellent guide for the development of the Irish economy. One would hope it will not come to be viewed as a highly political document and that it will ensure a long-term commitment to capital spending that will not fluctuate with the economic cycle. The documents contain very necessary and valuable projects which will improve the quality of life of citizens in Ireland. The onus is on all of us to make the strategy a success. Economic Eye Spring Update

6 2Labour market Island adds 51,800 jobs over the last 12 months Labour market Encouragingly, job growth in Ireland has been enjoyed by the majority of sectors. In Q3 2017, 11 of 14 ROI sectors employed more than they did one year ago, while all but 6 of 21 sectors in NI enjoyed flat or positive jobs growth 1 The fears of an immediate Brexit fallout have not materialised. Survey evidence suggests a significant proportion of firms report a negative Brexit impact but this is not easy to identify in the data on their reported sales or employment performance. Challenges in recruitment continue to appear in the business surveys, further reflecting a tight labour market In ROI, there has been widespread job growth on the back of a strengthening domestic economy and increased spending by government, combined with exports which have been boosted by improved global growth. In NI, it is perhaps surprising that the domestic sectors have not faced more of a squeeze. The increase in the number of people in work and tourist cross-border flows have partially ameliorated the real income squeeze The long-term commitments to capital spending in Ireland will support construction employment and supporting sectors and, consequently, the outlook has been revised upwards in these areas. Equally the unique position of Irish cities as predominantly English speaking service sector investment locations, with access to EU talent post Brexit, provides a favourable outlook assuming costs do not become prohibitive Agriculture remains the most difficult sector to predict across the island. It stands to endure the most disruption during Brexit and making forecasts is nigh on impossible given the possible changes to come. The outlooks presented should be seen as highly conditional Sectoral forecasting is becoming increasingly challenging as technology and business dynamics make it more complex to categorise firms into distinct buckets. Many firms straddle sectors and others are emerging in new sectors for which there is no easy classification. This complexity is challenging policy makers, lenders and advisors, not just economic forecasters Employment forecast: ROI and NI 2012 = Ireland 90 N. Ireland Source: EY Economic Eye forecasts Job growth forecast (000 s) Sector ROI NI Agriculture Mining and Quarrying Manufacturing Utilities Construction Retail Transport & Storage Accommodation & Food ICT Finance Real Estate Professional services Admin services Public Admin Education Health Arts Other services Total Source: EY Economic Eye forecasts 1 ROI: seasonally adjusted Labour Force Survey employment NI: seasonally adjusted workforce jobs 5 Economic Eye Spring Update 2018

7 3Focusing on 2018 outlook solutions Huge uncertainties and volatility against a positive backdrop would be a fair summation of the outlook in Spring This can make business planning complex but the forecasts do provide some business messages for the year to come: Managing costs Finding talent in a tight labour market with escalating property costs (particularly in Dublin) means firms must refocus on costs. Using economic forecasts to explore likely salary levels and financing/property costs can be extremely beneficial. Preparing for Brexit Estimates of the economic impact of Brexit are plentiful, but should firms use them in their contingency planning? How the economy looks in GDP terms in 2030 or beyond is not an entirely helpful strategic input. A more helpful approach is to take each of the possible channels of effect and explore, under plausible scenarios, what the impact of each would be. This tailored approach allows a more effective Brexit strategy to be developed, with possible opportunities maximised and risks mitigated. Sensitive solutions Businesses can contribute to the wider economic debate on the island, despite the obvious risks of doing so. Ireland now has a suite of policy documents and NI has the (albeit draft) Programme for Government. Businesses are critical to the delivery of these visions. Reinvigorated efforts of business organisations in both jurisdictions to produce thinking on the big policy debates are to be welcomed. Economic Eye Spring Update

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