Central Bank slightly reduces estimates for economic growth this year

April 8th, 2019

Central Bank slightly reduces estimates for economic growth this year

The Central Bank has slightly reduced its estimates for economic growth this year, amidst an ongoing weakening of the international trading and economic environment.

In its latest Quarterly Bulletin, the Central Bank expects GDP growth of 4.2% this year, down 0.2% since its January forecast.

It is all just a little bit weaker than even three months ago.

The forecast for both output and exports is down 0.2%, while consumer spending is forecast at just over 2% this year and next, compared with 3% last year.

It is due to a mixture of a weakening of the international trading and economic environment in which Ireland trades, and softer sentiment in the domestic economy, fueled by concerns over Brexit.

“This is mainly due to heightened uncertainty surrounding the global economy, including the risks in relation to trade disputes, higher protectionism, more stresses in international financial markets and already growth has slowed in the major economies,” said Mark Cassidy, director of economics and statistics at the Central Bank.

“Over recent years unemployment [in Ireland] has been gradually falling… and as the economy gets closer to a position of full capacity then there is diminishing scope for output growth due to less labour supply.”

Mr Cassidy also said some of the softness in the economy at present may be due to companies and individuals holding back on spending, as they wait to see what the outcome of the ongoing Brexit negotiations are.

Still the economy is set for strong growth this year of just over 4%, with unemployment set to average 5.4% for the year, dropping to 5% next year, and wages rising over the two years by 7%.

But that is based on Brexit being an orderly affair, with a deal and two year transition period.

In a disorderly no deal scenario, economic growth would be just 1% this year and next year.

“I would emphasise the inherent uncertainty surrounding any estimates in relation to a no-deal Brexit. It would be an unprecedented event,” Mr Cassidy said. “Our estimates indicate that economic growth could be of the order of 4 percentage points lower in the first year, and a further 2 percentage points lower in the second year.

“That would leave some positive growth, perhaps 1% to 1.5%, over those two years.”

Part of the Central Bank’s no-deal calculations include a significant further depreciation in the value of sterling, which it sees falling by 10% against the euro should Britain leave the European Union without a deal.

That would see one euro buy somewhere in the region of 97p – which represents an extremely unfavourable exchange rate for exporters.

“We think financial markets are currently pricing in a reasonably strong likelihood that a deal on Brexit will be agreed; it would be a shock to financial markets if there was no deal,” Mr Cassidy said. “Tariffs would come into effect also in the event of a no deal, and you would also get other disruptions to trade – difficulties in moving goods into and out of the country.

“All of those on top of each other would underlie the negative consequences for growth and employment across many parts of the economy.”

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