I propose to take Questions Nos. 52 to 54, inclusive, and 56 together.
Recent economic indicators have generally been positive, indicating that the recovery is continuing in a sustainable manner.
Modified domestic demand, which adjusts for distortions in the Irish economy, is up 5.2 per cent in the first three quarters of 2017. Growth is broad based with net exports also contributing positively to growth in the first three quarters.
The strength of underlying domestic demand is being felt in the labour market. Employment growth remains strong with an annual rate of 2.8 per cent recorded in the first three quarters of 2017, representing the creation of almost 60,000 additional jobs.
Data published in the first quarter of this year indicate that:
- Expansion in the manufacturing and services sectors continued in February with the Purchasing Managers’ Index for the sectors recording their fifty seventh and sixty seventh successive month of expansion respectively.
- The Consumer Sentiment Index was 110.4 in January, well above its long run average.
- The seasonally adjusted monthly unemployment rate for February was 6.0 per cent, down from 7.3 per cent in February 2015. As a result, the unemployment rate has fallen by almost two thirds since its peak of 16 per cent in early-2012.
As part of Budget 2018, my Department is forecasting real GDP growth of 3.5 per cent this year. The strong performance of the labour market is set to continue in the short term; my Department is projecting that an additional 48,000 jobs will be created this year. Strong employment growth is expected to further reduce the unemployment rate, to around 5 ½ per cent by the end of this year. The limited data so far available for 2018 has generally been positive and indicate that the momentum in the economy has been maintained.
However, there are a number of risks at present including the UK’s decision to exit the EU. In addition, the sharp appreciation of the euro-sterling rate is posing significant challenges, particularly for the traditional sector, the tourism sector and areas sensitive to cross-border trade.
My Department has incorporated the estimated impact of a “hard” Brexit into the macroeconomic forecasts published as part of Budget 2018. This shock is projected to reduce GDP growth by approximately ¾ of a percentage point on average per annum over the 2019-2021 period. These forecasts were endorsed by the Irish Fiscal Advisory Council (IFAC). The Department will publish updated forecasts as part of the April 2018 Stability Programme Update.
These projections were informed by Department of Finance – ESRI joint research which modelled the medium to long term impact of Brexit on Ireland. In particular, the forecasts were guided by the “WTO scenario”, whereby the UK and EU do not conclude a bilateral trade agreement and instead the UK exercises its rights under the Most Favoured Nation (MFN) clause of the WTO.
The best way to mitigate risks such as Brexit is to improve the resilience of the economy. The Government will play its part by continuing to implement competitiveness oriented policies – including those that address emerging bottlenecks – and ensuring that the public finances continue to be managed in a prudent fashion.
In addition, as part of the Government’s trade strategy, Ireland Connected, a number of measures have been set out to specifically address Brexit related issues, including diversification of markets for indigenous exporters. Greater market diversification must be part of the policy response, so that dependence and exposure to the UK market is reduced.