As I outlined in Budget 2019, our economy is in good shape. Following GDP growth of 7.2 per cent in 2017, GDP is forecast to grow by 7.5 per cent this year. While the GDP figures can be misleading in an Irish context, a broader range of measures including labour market and tax revenue developments confirm the economy is performing strongly.
Despite the rapid rate of growth, the main indicators of an overheating economy – for instance the growth in wages, prices and credit - do not yet suggest that overheating pressures have emerged.
The strength of the economic recovery has perhaps been most clearly evident in the labour market. Since the low point in 2012, close to 400,000 additional jobs have been created. As a result there are now more people in work than ever before. Importantly employment growth is broad based, with growth recorded in 10 of the 14 sectors reported by the CSO. Despite the improvements in the labour market, there remains some slack in the economy for employment to increase further.
Importantly the recovery in the economy has not yet given rise to significant inflationary pressures. For the first ten months of the year, inflation, as measured by the Harmonised Index of Consumer Prices (HICP), averaged just 0.7 per cent on an annual basis, this follows five consecutive years in which inflation has been below 1 per cent. Although price pressures have emerged in both the housing and the rental markets, this reflects the undersupply of housing over the last number of years, rather than evidence of over-heating pressures.
In relation to credit growth it should be noted that lending to Irish households only turned positive during the second half of 2017 after several years of contraction. Safeguards are now in place to help prevent a reoccurrence of the unsustainable build up in credit, most notability the macro-prudential regulations introduced by the Central Bank.
Over the coming years, our economy is expected to move towards full employment. As such, it is important that we remain cognisant of the upward pressure this will place on both prices and wages, which could give rise to a loss of competitiveness. While the economy is expected to continue to grow strongly, such pressures in the economy may give rise to imbalances over the medium term.
With this in mind, we will continue to focus on maintaining competitiveness-oriented policies and building capacity within the economy. In particular, we are now investing significantly to address the bottlenecks to growth which emerged during the economic recovery, such as the need for residential development and public infrastructure investment.
The Government will also continue to implement budgetary policies designed to enhance the resilience of our public finances. As set out in Budget 2019, we will ‘balance the books’ next year and are currently establishing the Rainy Day fund. This prudent approach to our public finances will help to mitigate against any future downturn in economy activity.