Economy good but caution required
THE Organisation for Economic Cooperation and Development delivered a timely if not dire warning last week that property prices here “may increase more strongly” which would boost further construction activity in the near term but “may induce another property bubble” associated with a strong surge in credit growth. At this relatively recent remove from the economic collapse, reference to a ‘‘property bubble’’ is enough to chill even the most optimistic going forward. So the analysis should be borne in mind by the Government and all policy makers while simultaneously meeting the many challenges which still exist in the broader economy.
That said, it was only last March that the OECD outlined many positives since the recovery. For example, living standards here are high, with recent improvements underpinned by the strongest post-crisis output recovery in the OECD. The economy has demonstrated impressive durability over the past three decades. Average wages are now comparable with the top tier of OECD countries and income inequality is reduced through the highly redistributive tax and transfer system. At the same time, people report a high level of work-life balance, feel safe in public spaces and have strong social connections, according to that analysis.
Furthermore, the economic recovery has broadened to domestic demand. Irish export performance has displayed sustained improvement and business investment by local firms is now recovering strongly, particularly in the construction sector. Household consumption has also been revived, aided by cuts in direct household taxes, strong employment growth and modest import price inflation. The unemployment rate has declined rapidly, leading to a pick-up in wage growth in some sectors. The economy is projected to continue expanding over the next two years, albeit at a more sustainable pace. The labour market will tighten further, with the unemployment rate projected to fall to around 5.5pc. GDP growth is expected to be around 2.5pc in 2019.
While the economic prospects, therefore, are good, and should not be lost in consideration of the OECD’s warning in relation to a possible property bubble emerging, neither should focus be taken from the clouds of uncertainty which lies ahead. Brexit is a serious risk to the economic outlook. Estimates show that a trade arrangement between the UK and EU governed by the World Trade Organisation could reduce total exports by 20pc in some sectors such as agriculture and food. Given the large share of multinational firms in the economy here, an additional risk to the outlook is rising international tax competition. This heightened uncertainty makes it vital to further improve the fiscal position. There are also concerns in relation to declining levels of productivity as well as further vulnerabilities in the bank sector which need to be addressed. Employer organisations have also warned about high regulatory barriers to entrepreneurship and there is also a continuing infrastructure deficit. More generally, citizens and particularly those on lower incomes and with lower skill levels, have huge concerns about housing, health and getting people into work. There is still much to do in terms of reform.
The balance which must be struck by the Government and policy makers is a delicate one, but the needs of society, particularly in the area of housing, are most urgent. However, no measures should be taken which would threaten the recovery and all advice from the OECD, the Central Bank here, and other think tanks and such organisations should be carefully weighed up on the road to prudence.