Strong economic growth is a sign of our economy’s competitiveness, with GDP up 6½ percent in year-on-year terms in the first half of this year. Although in the Irish context, GDP can be distorted by globalisation factors, other indicators such as modified domestic demand confirm continued growth in our economy. The strength of the economy is most clearly evident in the labour market. Total employment increased by 63,100 (+2.8 per cent) in the first half of 2019 while the unemployment rate for October fell below 5 per cent for the first time since 2007.
The strength of our economy reflects the important steps we have taken to improve our competitiveness. The 2019 IMD World Competitiveness Yearbook recently ranked Ireland as the 2nd most competitive country in the EU and the 7th most competitive country in the world. In addition, since 2008, the Central Bank’s real harmonised competitiveness indicator has improved by approximately 22 per cent.
Importantly, the robust economic growth in recent years has not yet given rise to significant inflationary pressures. In the first ten months of 2019, average annual inflation was just 0.9 per cent. On wage developments, average weekly earnings increased by 3.5 per cent year-on-year in the second quarter of 2019. The rise in household incomes is a welcome development, however it needs to be monitored closely, as a significant acceleration in wages could undermine Ireland’s competitiveness relative to other European countries.
Despite recent positive developments, the risks over the coming years are numerous and primarily external in nature. As well as continued uncertainty with respect to Brexit, there is also evidence of a continued slowdown in global growth, as has been recently reported by the IMF and the European Commission.
The Budget 2020 central scenario projections assumed a disorderly Brexit scenario. Under this scenario, GDP growth of just 0.7 per cent would be in prospect next year, reflecting both the impact of a no-deal Brexit and weakness in the global outlook. However, given recent events in the UK and the ‘flextension’ granted by the EU, a disorderly Brexit in 2020 is less likely, though still possible. Of course, any form of Brexit will have a negative impact on the Irish economy.
The best way we can mitigate against these risks is through prudent budgetary policy, careful management of the public finances and by focusing on competitiveness-oriented policies.