Irish Economy 2015: The ESRI (Economic and Social Research Institute) in its latest economic commentary forecasts a GNP (gross national product) rise of 4.6% next year with unemployment set to fall to an annual average of 9.7%.
In the Quarterly Economic Commentary (QEC), Winter 2014, issued Wednesday, the institute says that because of distortions caused by the foreign-owned sector, it prefers to use GNP compared with GDP (gross domestic product - the main difference is that the latter includes the profits of the significant foreign-owned sector).
However, GNP is also distorted by mainly US firms becoming Irish for tax purposes - in 2010 alone annual GNP was boosted by 2.9% by these so-called tax inversions - see box below.
The economists say that the Irish economy is set to grow by almost 5% in 2014 with unemployment likely to fall below 11.5% - the strongest growth rates since 2005. They say that while external demand remains a key component of the recovery, domestic contributions, and investment in particular, have become increasingly important. The strong economic performance has been mirrored by robust government receipts with almost all headline items reporting returns ahead of target for the year to November. The general government deficit for 2014 is likely to be around 3.5%.
The overall employment rate among persons aged 15-64 now stands at 62.2% compared to 61.1% in Q3 2013. Employment increased in ten of the 14 economic sectors over the year with the largest rate of increase recorded in Construction which is up 6.7% annually and 3.8% quarterly.
Today's report says that the majority of new jobs created continue to be full-time positions, with an increase of 1.8% over the year following an annual increase of 2.4% in Q2 2014.
However it should be noted the broad rate of unemployment is 21% while there should be a distinction between full-time employees and full-time self employed one-person operations where income can be volatile.
The economists say that taking account of the recently announced investment in social housing the ESRI forecast for house completions for 2015 is 16,000. "As we have previously discussed, this is below the forecast rate of new household formation and so points to a continuing gap between the demand for and supply of housing over the forecast period. Other building and construction output is also expected to increase, reflecting higher domestic activity levels and increased FDI flows. These factors, as well as the undertaking of previously deferred investment, will also underpin growth in machinery and equipment investment, both in 2014 and 2015. On the basis of this, we expect that overall investment will grow by 14.3% this year and by 12.8% in volume terms in 2015."
In a submission to the Central Bank (copy published with QEC) on proposed loan-to-value and loan-to-income mortgage restrictions, David Duffy and Kevin McQuinn wrote: "At this point in the Irish market based on these criteria, it is not clear that the envisaged measures are fully warranted. While house price growth has been significant over the past 18 months, in McQuinn (2014), for example, the results of four standard models of Irish house prices suggest that, as of Q4 2013, Irish house prices still appear to be undervalued. This is mainly due to the very sharp and persistent fall recorded in Irish house prices between 2007 and early 2013."
They suggested that the Central Bank should implement a rules-based system that would be used when warranted.
The QEC says Budget 2015 should have been more cautionary.
“This, we felt, struck the right balance between the need to maintain fiscal discipline and in particular meet the 3% deficit target in 2015 with the clear need to encourage and foster the recovery in the economy,” it said. “We advocated an increase in capital expenditure on social housing of approximately €500m, which we projected would be offset by the increase in water charges set to be imposed in 2015.”
If Eurostat, the EU statistics office, will rule in coming months that Irish Water should not be separated from the public finances, the deficit would be 2.8%.
Executive summary [pdf]
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