Ireland’s central bank has warned that Brexit is not the only risk to the Irish economy, with rising wages and a diminishing supply of available labour possible problems at a time when the international economic outlook has weakened.
The Irish economy has been the best performing in Europe since 2014.
But in its latest quarterly bulletin, the bank lowered its expectations for GDP growth this year to 4.2 per cent from 4.4 per cent, while keeping the forecast for 2020 at 3.6 per cent.
“We expect growth to moderate in 2019 and 2020,” Mark Cassidy, the central bank’s director of economics and statistics, said on Friday.
“This moderation reflects both the impact of a weaker international economic environment and reduced potential for growth in the domestic economy.”
The central bank said it expected unemployment to fall to an average rate of 5.4 per cent this year and 5 per cent in 2020, down from 16 per cent in 2012, when Ireland was midway through a three-year international bailout.
As the economy approaches full employment and spare capacity in the labour market shrinks, the central bank expects wages to increase by 3.6 per cent this year and 3.7 per cent next year.
Ireland is highly dependent on the activity of a relatively small number of multinational firms and a tight labour market and rising wages are off-putting for those that want to expand or for companies thinking of moving there.
While the underlying outlook for growth in the Irish economy remains positive, the central bank said underlying investment is expected to grow at a slower pace than in 2018 as uncertainty about Brexit and conditions in the external environment weigh on firms’ investment decisions.
Modelling by the bank suggests a disorderly, no-deal Brexit would knock as much as four percentage points off the Irish economy’s growth rate in its first full year and by more than six percentage points over a decade.
The “worst-case” Brexit scenario would see British demand for Irish goods collapse while fresh falls in sterling weigh on the competitiveness of Irish exporters.
The central bank’s official forecasts assume Britain leaves the European Union with a deal that includes a transition period that would allow trading relationships between Ireland and the UK to continue for several years without substantial change.
The proposed Withdrawal Agreement, which has not yet been ratified by the British parliament, would see the UK continue to participate in the EU Customs Union and the Single Market until the end of 2020.