A tale of two economies: Bank of Ireland publishes latest Economic Outlooks for Ireland and the UK

The latest Ireland Outlook from Bank of Ireland highlights the strong momentum in the Irish economy, with activity in the first three quarters of 2017 ahead of expectations and high frequency data indicating that there has been a good start to this year. GDP is now estimated to have expanded by 7.0% last year (revised up from 4.8%) and Bank of Ireland is raising its forecast for 2018 to 4.7% (from 3.8%).

In its UK Outlook, the Bank notes that the UK economy has been expanding at a moderate pace against the backdrop of the Brexit negotiations. This is expected to continue, with GDP growth of 1.7% forecast for 2018.

Assuming the status quo is maintained in terms of current UK-EU trading arrangements, the Irish economy is projected to grow by 3.8% next year and the UK by 1.6%.

Discussing the latest Economic Outlooks, Dr Loretta O’Sullivan, Group Chief Economist, Bank of Ireland said: “The Irish economy is powering on. We are pencilling in GDP growth of 4.7% for this year, which would put Ireland at the top end of the euro area growth league table for a fifth year running. In the UK, it is a case of ‘steady as she goes’, with the economy expected to expand by 1.7% in 2018, much the same as last year.”

“Further job gains and rising incomes are expected to underpin solid consumer spending in Ireland. Underlying investment, especially construction activity, is set to expand as well, with exports continuing to benefit from the improving global economy. The global upswing is also supporting UK exporters, as is the weak pound, and our forecasts allow for some rebalancing of the UK economy, with softer consumer spending partially offset by firmer exports.”

Dr O’Sullivan added: “As always there are risks to the outlook, not least Brexit uncertainty. This is the big issue for the UK and is also a cloud on the horizon for Ireland, along with uncertainties related to the external policy environment and exchange rates. These aside, it is clear that the Irish economy is back on its feet with a range of indicators above their previous peak and others not far off.”

Diverging consumer picture

Retail sales in Ireland rose by 4.3% last year and while new car sales started this year on a softer note, used imports were robust. Household confidence has been on a broad upward trajectory in recent months, with the Bank of Ireland Consumer Pulse posting a two year high in January. On the labour market front, employment growth averaged 2.8% year-on-year in Q1-Q3 2017, taking the number at work to 2.2 million and not far off its previous peak, and at 6.1% in January, the unemployment rate remains on a firm downward path. Further job gains and rising incomes are expected to underpin consumer spending increases in the order of 3.0% this year and next, while the unemployment rate is projected to fall to around 5.0% by the end of 2019.

The situation in the UK is different; with retail sales softening and household confidence at a low ebb. At 3.0% in January, inflation is still well above the Bank of England’s target and will weigh on households’ purchasing power in the period ahead, notwithstanding ongoing job gains. Reflecting this, consumer spending growth is expected to be relatively weak at 1.0% this year and 1.3% next year.

Dr Loretta O’Sullivan, Group Chief Economist, Bank of Ireland said; “Irish households look to be in a reasonably good place at the moment. Jobs are being created and with incomes rising and debt coming down, finances are in better shape. Inflation is subdued and confidence is at a two year high. This bodes well for spending. While tailwinds abound for consumers here, UK households are feeling the pinch. Inflation is high so consumers are getting less bang for their buck and the Bank of England has started to hike interest rates.”

Brexit uncertainty a negative for both

In Ireland, total investment recorded a sharp year-on-year decline over the first three quarters of last year, whereas modified investment (which excludes volatile R&D-related intellectual property imports and aircraft leasing) averaged double digit growth. Looking beyond the headline numbers, strong residential and commercial demand is supporting construction activity, though new housing is still in short supply and putting upward pressure on prices and rents. While Brexit uncertainty has been weighing on business sentiment, firms were in a more upbeat mood in January and the majority remain on a growth trajectory with two in three looking to expand their business in the next 1 to 3 years. Some unwinding of the globalisation factors that boosted investment in recent years is likely over the next while. This will weigh on the total figures, but with the domestic and global economies growing, underlying investment is expected to expand at a solid pace.

In the UK, Brexit uncertainty has been a drag on business investment and is expected to continue to be over the forecast horizon. The need to improve efficiency and expand capacity has contributed to some improvement in firms’ investment intentions lately however, with the better external environment helping as well.

Upturn in global economy a positive

Irish exports were up 5.1% on an annual basis in the first three quarters of 2017. Services led the way, with goods staging a rebound in the third quarter (having been weighed down by weak contract manufacturing activity in the first half of the year). Foreign direct investment flows were stable last year, with the IDA securing a number of Brexit related investments. Looking ahead, export growth of 5.2% is forecast for this year and 4.5% for next year, underpinned by solid activity in our main trading partners.

In the UK, the depreciation of sterling is providing support, with exporters also benefitting from the upswing in the global economy.

Dr Loretta O’Sullivan, Group Chief Economist, Bank of Ireland said; “The Brexit vote has led to a fall in the value of sterling and a rise in uncertainty. The weak pound is impacting both economies but in different ways. It is a headwind for Irish exporters but is boosting UK exports, which rose at their fastest pace in more than 6 years in the year to Q3 2017. As for Brexit uncertainty, this is taking a toll on the business environment in the two countries, though the upswing in global activity is a positive for firms in both.”