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Is 5% GDP growth really sustainable?

28/10/14

Ireland's GDP is growing fast after years of struggle, but will things still be so good next year?

For many years, ireland was the Celtic Tiger, the one country in the west where the growth in prosperity could be compared with the rapidly expanding economies of south-east Asia.

Of course, the idea that the country could go on booming on the basis of building ever more properties, trading on a European Central Bank monetary policy more geared to the needs of Germany and France than small countries on the periphery, and the advantages of an ultra-competitive corporation tax rate appeared to be justified for a time - and then reality struck.

The question now is whether this is a lesson of history that some have failed to learn. An almighty Irish boom was followed by a spectacular bust. While the country may have battled through a deep period of austerity imposed for its share of the eurozone bailout - and emerged from the downward spiral far more impressively than other embattled countries like Portugal and Greece - it does not necessarily follow that there will be a sustained boom.

What is true at present is that the country is seeing strong growth now. The Economic Social Research Institute (ESRI) recently predicted gross domestic product (GDP) will increase by five per cent this year. That may be true, with the country currently enjoying the fastest growth rate in Europe, but the ESRI has stuck its neck out by forecasting five per cent next year as well.

Caution and the warnings of history may not be the only reason to question this forecast. There are clearly tailwinds among some of Ireland's key trading partners. The eurozone has been struggling again, Germany appears at serious risk of slipping back into recession and even the US and Asian markets have been growing by less than anticipated a few months ago.

Of course, the UK has also been growing quite strongly - with the latest forecasts tipping British GDP to be over three per cent this year. This is the strongest growth in the G7 and as a major trading partner for Ireland, that has to be good news. Against that, however, Britain's economy is expected to see weaker growth next year, albeit around 2.5 per cent or upwards. The prime reason for this has been the expectation that the Bank of England will raise interest rates early in 2015, but now the UK is also facing the same international tailwinds as Ireland. That may delay the rate rise, but still hit growth.

The threats are undoubtedly there, and to the European problems may be added the volatility in the global economy revealed in share price drops, plunging oil prices and fears of a global ebola pandemic.

However, while these factors may make some predictions of sustained high growth in Ireland's economy less likely, the fact remains that the employment market is getting much better. Our third quarter survey revealed that the number of registered jobs was 26 per cent up on the same period of 2013. Given the impact that will have on consumer spending power and the message it sends about where companies see the economy going, there may be more reason for optimism than the gloomier commentators believe.

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