Davy today looks at the political risk to the Irish economic recovery following the success of a radical left party in last month's Greek general elections and Irish polls that show strong support for anti-austerity parties, in particular Sinn Féin, and also non-party politicians.
The next Irish general election is due to be held in the next 12 months and Conall Mac Coille, chief economist, says that "it is far from clear whether Sinn Féin and independent candidates can translate this support into actual electoral success. We have commissioned independent political scientist David Farrell (see separate report, also issued this morning) to assess the current state of Ireland’s political landscape. While an extreme left-leaning government seems unlikely – a broader coalition government may be likely after the next election."
The Davy report says: "Our current Irish GDP growth forecast is 4.8% in 2014, 3.7% in 2015 and 3.4% in 2016. This means that Ireland will be the fastest-growing economy in Europe. Why?
First, the Irish economy is naturally experiencing a catch-up process, having seen one of the deepest and protracted recessions through the financial crisis. The EU/IMF programme of support has helped to stabilise Ireland’s public finances and banking sector – providing a platform for growth. However, perhaps missing from similar programmes in Greece and Portugal was an effective growth strategy. Ireland has focussed on the export sector, successfully attracting FDI – evident in the strong expansion of the ICT services sector."
Finfacts recently highlighted the poor FDI (foreign direct investment) performance of Greece compared with its near neighbours and the fact that Portugal was the fourth biggest recipient of Chinese outward FDI in the past five years, while Ireland has yet to appear on the radar for China's investors.
Our own view on Irish FDI performance is that from the dip in 2009 there hasn't been a spectacular FDI recovery but rising exports in particular services exports hugely boosted by Double Dutch Irish tax avoidance schemes, were positive for the international reputation of Ireland (most external commentary on the Irish economy wrong the as distortions caused by the foreign-owned sector are not understood.
Despite the efforts of IDA Ireland, the inward investment agency, jobs in foreign-owned exporting firms in 2014 were below the level in 2000 despite a surge in headline exports.
The CSO shows that from the end of 2009 to Q3 2014, there were 5,000 jobs added in 'Information and communication' as a whole while total jobs in services grew by 17,000 from 2009 to 2013 and likely at 21,000 by 2014 with about 8,000 of them part-time or temporary.
The report says that Davy's forecasts for GDP growth imply that the deficit will narrow to 2% of GDP by 2017 with no further fiscal adjustments. So the next government may not have to implement fresh spending cuts or tax rises. However, Ireland has traditionally implemented pro-cyclical fiscal policy, with budget giveaways around election time. It says political pressures for inappropriate spending increases and tax cuts will surely build – whatever the hue of the next government. However, the bigger picture is that a sharp reversal in budgetary policy would be required to endanger debt sustainability – which we do not think is likely.
Prof David Farrell looks at four scenarios: (1) steady state, where some combination of established parties form a coalition; (2) the Greek outcome, where the newer forces of the left form a coalition; (3) middle of the road, where a coalition is formed between established parties and some elements from the left; and (4) electoral uncertainty, where a minority and unstable government is formed. Of these, the least likely scenario is the Greek outcome; the most likely outcomes will either be steady state or middle of the road.
© Copyright 2015 by Finfacts.ie