The Economic Outlook for 2016

 
 

As we move further into 2016, the Irish economy continues to be stable. Megan Fanning looks at the economic implications of the upcoming general election and Brexit referendum in the UK, and assesses whether 2016 will be a boom or bust year for the economy. 

You can always tell how well the Irish economy is doing by the amount of cranes in the Dublin skyline. During the Celtic Tiger era, they consumed your view from anything else, and during the crash there was none at all. Now, Ireland is seeing more and more go up every day. Our economy is improving and growing and coming out of a harsh recession – but are we out of it, and what does 2016 hold for our economy and for the people of Ireland? It is difficult to tell; with economists and markets giving differing views, who do we believe? Unfortunately, the Irish economy is dependent on too many factors outside of its control, from the upcoming general election to the Brexit referendum and the global economy.

2015 was a tremendous year for the Irish economy. It was the healthiest year we have had since the recession began. A momentum was built that was not found in previous years. The economy is back on track and it must be maintained over the next few years. The labour market, in particular, saw a very healthy boost. The unemployment rate was 15.2 per cent at its peak of the recession; in 2015, it came down to 8.9 per cent. Economists predict that this will fall further to about 7 per cent by the end of 2016. A country is considered to have full employment at 4 per cent, so Ireland is on track to achieve this over the next few years. As a result of increased job creation, consumer confidence is at a nine year high and there has been a strong turnaround in consumer spending over the last year which is set to increase for the coming year. A recent RedC survey showed that 47 per cent of the adults surveyed said that 2016 is going to be a better year. People are more confident in the economy and happier with the direction it is going in compared to recent years. Overall, 2015 provided a very stable platform for 2016 to start off on with increased activity in all sectors, happier consumers and less unemployment.

Something which is going to have a large effect on the Irish economy this year is the Irish General Election. Taking place on 26th February, it is guaranteed to have a deep impact on how well, or badly, our economy does during the year. In October’s Budget for 2016, the Government were very forthcoming and generous in their allocations of expenditure, and this perhaps had a direct influence on the increased consumer happiness mentioned previously. Some experts thought that perhaps the government were too generous in that Budget and that should we move our economy too quickly it will all just collapse. In the campaigns for the general election, the Government parties of Fine Gael and Labour are fighting off the grounds of having built a stable economy back up with potential to be great once more. On the other side, opposition parties like Sinn Féin are playing to the problems of the Irish people, such as the mishandling of Irish Water and the recent flooding. However, it doesn’t really matter what the parties say, it is the confidence in their economic policy that matters. Yes, the voters decide who makes up our parliament but it is market confidence that defines our economy. Experts warn that the economy must continue at a slow, progressive rate and that optimism is vital. The Government plan on selling off parts of AIB to recover some of the €21 billion spent bailing it out. There is also preparation for an initial public offering on the Dublin and London stock markets, possibly in early spring or summer. This would provide great confidence in the Irish economy and for investors.

Another factor outside of our economy’s control is the UK’s Brexit referendum. British Prime Minister, David Cameron, has promised the British public an in/out vote on their membership within the European Union, which could take place in 2016. Should Britain leave the European Union, it will have an extreme effect on the Irish economy. The UK is our most crucial trading partner, and if they leave it will restrict us. We will no longer have freedom of trade or freedom of labour, and it will become more difficult to operate trade with them. There will be massive trade losses with agrifood, technology, finance, tourism and more. Some say that Ireland will benefit as we would become more competitive to international trade but that does not outweigh the losses we would make from their exit.

The experts are saying that regardless of who forms the next government, Ireland must abide by a redeeming fiscal policy – a somewhat conservative approach; not austere, just cautious. As it stands we are benefitting greatly from this approach. Ireland is being charged an incredibly low interest rate on its debt borrowings which indicates that international investors hope and expect that the next government formation will continue as was. However, credit agency, Moody’s, has said that should government drastically change its fiscal policy, it will downgrade our credit rating. If the economy moves too quickly to cut taxes and increase spending, our economy will only be back at step one. The government must remain cautious and continue as we have begun; the economy is too fragile to play with. The government especially must not trial new policies with the way the global economy is going. Ireland’s incredible turnaround is completely out of shape with the fragility and weakness of the other Eurozone countries, which are struggling with low inflation rates and stagnant economic growth. And it is not only Europe which is struggling; global equity markets dropped to their lowest levels since 2013 on Wednesday, 20th January, to put them on track for one of the worst monthly performances on record as oil prices tumbled even further. Given the fact that Ireland is a small open economy, it is incredibly volatile in reaction to the global markets. Decreasing oil prices indicate slowing growth and possibly even negative growth in the United States, an economy which Ireland is greatly dependent on.

Ireland must also take note of emerging markets. The countries known as BRIC (Brazil, Russia, India and China), have also begun to struggle in recent quarters. Both Brazil and Russia are in recession and China’s growth is beginning to slow down. These emerging markets had been carrying the global economy recently due to stagnant growth rates in other countries. However, despite their impact on the global market and their indirect effect on Ireland, fortunately due to the fact that their economies have only globalised recently, Ireland has not built major trade links with any of the four countries, so the there will not be much of a direct effect on our economy. However, should they worsen, their effect on the global economy will have a domino effect on us. There is an ongoing debate between investors and economists. Investors believe that there is reason to panic over the markets whereas economists do not. The movements within the market suggest that there is cause for concern over the Chinese markets, however economists believe that yes, China is slowing, but it is not collapsing and that falling oil prices are generally a positive and not a negative thing. Both the International Monetary Fund (IMF) and the Organisation for Economic Co-operation and Development (OECD) forecast positive global growth for 2016, with 3.4 per cent and 3.3 per cent predicted respectively.

So what is going to happen to the Irish economy over the course of the year? Activity in all sectors is going to continue. It will most likely increase, and in response to that, unemployment will keep falling and consumer confidence will rise. Currently, our Gross Domestic Product (GDP) is increasing at an accelerated rate at which the deficit and debt ratios are falling. Ireland is entering this year with our budget deficit below 2 per cent of GDP, and within two years we are likely to remove our total deficit. Also, forecasts for our economic growth are healthy too, but it is expected to slow down compared to 2015. The Economist Intelligence Unit expects real GDP to slow from 6 per cent in 2015 to 3.8 per cent in 2016. The OECD increased its growth rate for Ireland – it had originally forecasted a growth rate of 4 per cent but now expects 4.1 per cent, and predicts us to be the fastest growing economy in the European Union; only Romania comes close to our predicted growth rates. However, economic growth is still widespread with only Greece still in recession.

The OECD also expects that Irish exports will rise in line with increasing demand in its trading partners while commercial investment should remain healthy due to a weakened Euro making Ireland very competitive. Consumer spending is going to increase in 2016 due to a healthier labour market, and although some have expressed concerns over rising property prices, the rising incomes will support the increase in commercial and residential rent and asset prices. It looks like 2016 is going to be another healthy year for the Irish economy. The European Commission has said that the country’s recovery appears resilient to weaker global growth. However, this should not be taken for granted. Although, our economy is recovering, it has not yet recovered. IBEC’s summary and prospective for 2015/2016 stated that arrogance and complacency are dangerous and that we must manage and regulate as seen with the Central Bank’s new credit requirements. Steps like these are steps in the right direction to ensure less volatility and more stability within our economy and to ensure prosperity and encourage confidence in our markets.

The Irish economy is currently in a very strong state, albeit a vulnerable state. It is an incredibly positive time to be coming into the labour market. There is employment, growth and money in the economy once more. Its continued success is, however, reliant on who forms the next government and what their strategy is to continue through 2016. The economy’s success is also dependent on Brexit, but for the time being, this cannot affect market confidence as it is too soon. While the global markets are weakening and it is predicted that they will weaken more, the Irish economy has not been this strong and stable in years. It is difficult to draw a conclusion when there are so many open ends but that’s the nature of economics. It is difficult for one to predict a crash, never mind prevent it, as the Nobel Laureate, Paul Samuelson, once said “Wall Street indexes predicted nine out of the last five recessions!”

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