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Despite the heightened level of risk, firms across the island remain positive.
It is a peculiar time for the all-island economy. On the brink of Brexit, and against a backdrop of increased anxiety over global growth, both jurisdictions continue to enjoy strong levels of job creation, and a need for more talent is the most frequent business message.
Headline growth remains exceptionally strong in the Republic of Ireland (ROI), and though more sluggish in Northern Ireland (NI), it is a long way from the predictions of catastrophe that followed the Brexit vote. Our latest Economic Eye forecasts are modestly revised from our November update, with an uptick in 2018 growth across both jurisdictions, and a very slight downward reduction in growth expectations in 2019 and 2020 for ROI. This reflects a weaker global growth outlook.
The forecasts are based on UK and EU trading conditions remaining unchanged over the forecast period due to the adoption of a transition agreement. At the time of writing, it remains impossible to say if this is indeed what will transpire at the end of March.
Firms’ sentiment remains bullish
Despite the heightened level of risk, firms across the island remain positive about their own prospects. Our new survey of 600 EY leaders across the island reveals an overwhelmingly bullish outlook. Though firms report growing unease and face a number of challenges, not least sourcing appropriate talent, the mood would be best described as ‘busy but watchful'.
Job market growth likely to slow
We expect job growth to slow across the island. In ROI, this reflects a tighter labour market and more expensive labour costs. In NI, overall weaker growth is the primary reason. Nevertheless, 211,000 more people are projected to be in work across the island in 2024 than there are today.
Brexit a concern, but far from the only one
It is the apparent paradox, of business growth set against a backdrop of great uncertainty and change, that makes it such a peculiar time for the economy. Data must be reviewed carefully to spot the ‘Brexit effect’, arguably because Brexit is yet to happen. In our Brexit update in this report, we contend that care must be taken to not make Brexit the answer to every question relating to underperformance, at the macro or individual firm level. Correctly diagnosing the source of problems helps to better craft solutions, whether that is in the corporate boardroom or the government policy lab.
Scenarios reveal the scale of risk Brexit scenario analysis carried out using the Economic Eye model reveals the scale of downside risk, with NI particularly vulnerable given its lower base growth. Domestic strength provides insulation for ROI, but in the event of a fractious no-deal, the possibility of recession in NI cannot be discounted.
Facing challenges from a position of strength
The warning signs cannot be ignored, and the possibility of a very challenging 2019 cannot be dismissed. The good news is that the island faces the forthcoming challenges from a position of relative strength, but the potential disruption from a complicated Brexit means that an agile strategy is required to facilitate a swift reaction to whatever the economic conditions will be. It will require great political skill and delicate negotiating skills to navigate a no-deal situation. Businesses across the island continue to hope such skills will not be required. As inward investment continues to flow into both jurisdictions, it is clear that the island is still a good place to do business even in the face of increased levels of risk. Watchful yes, but thankfully, encouragingly busy.
There is no doubt that the global outlook is becoming uncertain, but the continued level of job creation across the island highlights the quality of our businesses and their ingenuity to seek out opportunity, while at the same time managing and mitigating any potential risk, which will be key in 2019
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Chapter 1 - Economic outlook
Global outlook revised down
Increased anxiety among forecasters of an impending global slowdown
China feeling trade effects
The World Bank revised down its 2019 global growth forecasts modestly in January from 3.0% to 2.9%. ‘Darkening Skies’ was the title of the report which reflects the increased anxiety among forecasters of an impending global slowdown. Japanese, German and Italian GDP contracted in Q3 2018, a sooner than expected slowdown. Germany was the first of these to release Q4 data which showed a pickup, thereby avoiding a technical recession (two or more quarters of contraction). A preliminary estimate of 1.5% GDP growth was reported for 2018, the country’s slowest recorded growth in five years.
The latest Chinese data showed the lowest exports in two years, but the government introduced stimulus measures including tax cuts in order to boost domestic demand. The trade surplus with the US is the largest it has ever been, but lower than expected activity is igniting fears of a slowdown. The country posted 6.6% growth for 2018, which was in line with global expectations, but the slowest since 1990 and lower than the 6.8% growth of 2017.
US Government shutdown expected to curb strong performance In the US, the longest government shutdown in history has likely negatively impacted economic growth. The US growth forecast according to the World Bank for 2019 is 2.5%, but a Bloomberg survey of economists raised the probability of a US recession to 25% in the next 12 months.
Financial market volatility reflects increased risks 2018 was a disappointing year for global stock markets, both in terms of losses and the scale of swings throughout the year. It is argued that the calm experienced in the previous years was not the ‘norm’ but rather a result of accommodative monetary policy and an era of unprecedented low interest rates, which is slowly coming to an end. Brexit has not caused as much market upset as expected by many, even in currency markets.
US on different currency and interest rate path Brexit scenarios pointing towards a softer or no Brexit have increased the value of the pound in recent months, but its value is still well below its pre-referendum level against the euro (-11.1%) and the dollar (-10.0%). There is scope for a rebound in the event of a positive Brexit outcome. The euro has lost some of its value against the dollar in the last 12 months (-6.5%) amid concerns of slower European growth.
The UK has begun modestly raising interest rates, with one increase each year in 2017 and 2018. The current rate of 0.75% is not projected to rise at all in 2019 given prevailing conditions, though a sharp uptick in imported inflation could alter that position. These historically low interest rates arrest the ability for governments to influence demand and control the rate of inflation. This has raised asset prices and curbed savings rates through very low returns. The US has acted differently, with the Federal Reserve (FED) raising rates nine times since the end of 2015, four times in 2018, with the most recent rise in December bringing the interest rate to 2.5%.
What does this mean for the island of Ireland?
The increased anxiety over the health of the global economy is concerning for the all-island economy. Although more directly impactful on ROI growth given its more global structure, it materially impacts both economies through demand for exports. Irish GDP can swing wildly on the fortunes of a few firms and their policies over the location of Intellectual Property (IP). Therefore, alarming swings need to be treated calmly and in tandem with other barometers of the state of the economy, such as the labour market. There seems little evidence of a slowdown in inward investment into ROI, and NI reports a healthy pipeline too, suggesting concern may not yet have translated from the economists’ pens to the corporate boardroom.
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Chapter 2 - Economic outlook
Island forecasts
2018 beats expectations, weaker world outlook impacts ROI forecast
Headline growth forecasts ROI is storming ahead with 8.3% growth expected for the full year 2018, and 3.9% in 2019, almost three times that expected from the UK. NI is expected to have grown modestly ahead of the UK in 2018, at 1.5%, based on available labour market data. It is expected to experience much slower growth of under 1% in 2019. The consensus across the island is that Brexit has not yet had a significant impact on growth in 2018. The fallout is expected to begin to impact the economic data from 2019, in which there may be an adjustment period if Brexit goes ahead as planned at the end of March.
Headline GDP suggests two economies moving at completely different speeds but in truth, both are ahead of expectations. Job growth is strong in both NI and ROI, with the unemployment rate currently lower in NI. The dual strength of the domestic and international sectors in ROI is driving fast growth, whilst the structurally more insular NI is expanding at a more sedate, but still welcome, rate
ROI - reaching the top of the cycle?
ROI is facing into Brexit headwinds on a strong foundation as GDP growth figures continue to impress. Removing the effects of IP relocation and aircraft leasing, Modified Domestic Demand (MDD) is predicted to be 4.2% for the domestic economy in 2018 and 3.7% in 2019. This resilient economic performance reflects a strength in the domestic economy and healthier public finances, which complement the global sector.
NI - steady, but beating expectations
Growth outlook - NI The latest Q3 data for NI shows stronger than expected growth. The NI Composite index reported an increase of 2.1% in the year to Q3, ahead of the UK (1.5%) for the year, but marginally below the UK’s quarter on quarter growth (0.4% compared to 0.6%). Coupled with strong labour market performance, the data has led to an upgrade of the 2018 NI growth forecast to 1.5%, up from 1.3% in the previous Economic Eye report. Brexit appears to have had limited impact on the overall economy to date, though clearly individual firms have been affected. 2019 is a much more unpredictable picture, with Brexit likely to have a more noticeable impact on the headline figures.
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Chapter 3 - Key business and policy messages
Businesses - seeing past uncertainty
A potentially disruptive 2019 cannot lead to paralysis or caution
Uncertainty is usually considered unwelcome for businesses, but it also presents opportunities. For firms across the island, a potentially disruptive 2019 cannot lead to paralysis or caution.
Our key messages for 2019 are:
Summary
It is a peculiar time for the all-island economy. On the brink of Brexit, and against a backdrop of increased anxiety over global growth, both jurisdictions continue to enjoy strong levels of job creation, and a need for more talent is the most frequent business message.
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