Economic Outlook November 2019 Ireland Country Note

 151

Ireland On the assumption of a “smooth” Brexit, GDP growth in Ireland is projected to remain robust, though moderating. Abstracting from multinationals’ volatile activities, underlying domestic demand will remain resilient, supported by strong construction investment and despite the toll taken by slower trade partner growth and high external uncertainty on business sentiment. The labour market will tighten, and the associated wage pressures will push up inflation.

Fiscal restraint has been needed to avoid overheating and to build buffers in the face of risks, including those related to the Brexit negotiation. The government plans to deploy a significant fiscal package in the event of shocks related to Brexit, while letting the automatic stabilisers fully operate.

Underlying growth momentum has slowed but remains solid Total domestic demand, adjusted for volatile activities of multinational enterprises, continued to grow at a solid pace of around 3% in mid-2019, following very strong expansion over the preceding years. Business sentiment has declined since early 2019, on the back of the higher risk of a ‘disorderly’ Brexit. Equipment investment has stalled over recent months, but construction activity has kept its momentum and industrial production remains resilient. The unemployment rate has reached historically low levels, and wage growth has gained further momentum recently. In contrast, inflation remains moderate, pulled down by lower import costs. Consumption is robust, underpinned by strong gains in employment and income as well as improved net worth, notwithstanding weakened consumer confidence over the past few months.

Ireland Labour market conditions remain strong Y-o-y % changes 10

← Wage rate

Uncertainty is weighing on confidence¹ % 72

% pts 2.5

Business climate

8

← Employment

6

Labour force participation rate → 70

71

2.0 1.5

4

69

1.0

2

68

0.5

0

67

0.0

-2

66

-0.5

-4

65

-1.0

-6

64

-1.5

-8

63

-10

62 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019

Consumer confidence

-2.0 0

2013

2015

2017

2019

-2.5

1. The series are normalised using their long-term average and standard deviation.

Source: OECD Economic Outlook 106 database; and European Commission, Economic Sentiment Indicator.

StatLink 2 https://doi.org/10.1787/888934045563

OECD ECONOMIC OUTLOOK, VOLUME 2019 ISSUE 2: PRELIMINARY VERSION © OECD 2019

152 ď ź

Ireland: Demand, output and prices 2016

2017

GDP at market prices Private consumption Government consumption Gross fixed capital formation Final domestic demand Stockbuilding1

271.4 91.8 33.5 96.6 221.8 6.6 228.5 328.0 285.1 42.9

Total domestic demand Exports of goods and services2 Imports of goods and services Net exports1

2019

2020

2021

Percentage changes, volume (2017 prices)

Current prices EUR billion

Ireland

2018

8.1 3.3 3.5 -7.1 -1.2 1.3 11.4 9.1 0.9 10.0

8.3 3.4 4.4 -20.6 -5.2 -2.4 -6.4 10.4 -2.9 15.5

5.6 2.6 4.0 39.2 17.5 2.1 22.2 10.0 20.6 -6.1

3.3 2.4 4.3 -26.9 -8.5 0.3 -7.9 4.8 -4.7 10.8

3.0 2.3 4.1 4.5 3.3 0.0 3.2 4.4 5.1 0.9

8.1 1.1 0.3 0.2 6.7 6.0 -0.3 77.4 67.8 0.5

8.3 0.8 0.7 0.3 5.7 5.8 0.1 76.0 63.6 10.6

3.9 0.9 0.9 0.9 5.3 5.8 0.3 71.4 59.0 1.4

3.8 2.0 1.7 1.7 4.8 5.6 0.5 66.6 54.2 9.6

3.3 2.5 2.2 2.2 4.6 5.2 0.7 65.4 53.0 9.9

Memorandum items GVA3, excluding sectors dominated by foreign-owned multinational enterprises GDP deflator Harmonised index of consumer prices Harmonised index of core inflation4 Unemployment rate (% of labour force) Household saving ratio, net (% of disposable income) General government financial balance5 (% of GDP) General government gross debt (% of GDP) General government debt, Maastricht definition (% of GDP) Current account balance (% of GDP)

_ _ _ _ _ _ _ _ _ _

1. Contributions to changes in real GDP, actual amount in the first column.

2. So called "contract manufacturing" (exports of goods produced abroad under contract from an Irish-based entity) by multinational enterprises is assumed to remain at the 2019 level in 2020 and 2021.

3. Gross value added. Data for 2017-2021 are OECD 's estimates.

4. Harmonised index of consumer prices excluding food, energy, alcohol and tobacco.

5. Includes the one-off impact of recapitalisations in the banking sector.

Source: OECD Economic Outlook 106 database.

StatLink 2 https://doi.org/10.1787/888934046532

Fostering resilience is key The recent improvement in public finances largely reflects strong cyclical conditions, while public debt as a share of measured underlying economic activity remains high, calling for continued fiscal prudence. The government has been ramping up public investment as part of Project Ireland 2040, which has supported construction activity over the past year. The plan should be implemented conditional on pursuing the target of further reducing public debt, with the focus exclusively on projects with the highest social returns, while avoiding fuelling the risk of overheating. At the same time, the government should contain expenditure overruns, which have been significant in some sectors, notably in health.

While labour market conditions have tightened, labour force participation remains low by historical standards, despite government tax and benefit reforms aimed at boosting it. The authorities should enhance up-skilling and re-skilling programmes to help the inactive population return to work. In particular, an emphasis on training in digital skills is important, given the shortages of such skills in some sectors.

Growth prospects hinge on the outcome of the Brexit negotiations Output will expand at a more moderate pace over the next two years due to increasing capacity constraints and weaker external conditions, including the slowdown in Europe. The unemployment rate will continue to fall to historically very low levels, albeit more slowly, with wage pressures becoming intense. As firms pass higher wages partially to prices, competitiveness and profitability will deteriorate, given weak productivity growth.

OECD ECONOMIC OUTLOOK, VOLUME 2019 ISSUE 2: PRELIMINARY VERSION Š OECD 2019