By Staff Reporter

Ahead of the 2019 Budget, a respected economist has cautioned against fiscal electioneering.

In his latest economic outlook for leading insurer and investment provider Friends First, Jim Power highlights recent research showing clearly that Ireland is over-reliant on the performance of a narrow base of firms and economic sectors.

With the combination of the housing supply crisis and unacceptably high house price inflation, Power said Ireland is facing a crisis of competitiveness.

Since the low point of the market in February 2012, house prices have increased by a staggering 92.7 per cent in Dublin and 74.4 per cent in the rest of Ireland in the period to June 2018.

“Budget 2019 will be delivered against a positive economic backdrop but there are challenges domestically and internationally,” said Power, a long-standing advocate for investment in Ireland’s indigenous sector.

“Given that Ireland’s level of real debt is still dangerously high … it is difficult to see how any form of expansionary fiscal policy can be pursued by the Government.”

Power stresses that the lack of a diversified economic model is a real threat to sustainable growth for Ireland.

“We cannot ignore the fact that the top 10 per cent of firms in Ireland account for 87 per cent of value-added in manufacturing and 94 per cent in services,” he said, noting that “a third of total exports are accounted for by just 5 firms and 39 per cent of corporation tax is paid for by the top 10 companies.

“Any shock to these firms or sectors would reverberate throughout our economy and undermine the positive growth achieved. In this context, it is essential that policy makers do as much as possible to support the rest of the economy, particularly the indigenous companies that make such a high value-added contribution to the Irish economy,” he added.

An analysis of the trends in consumer price inflation, according to Power, does not suggest that the Irish economy is currently experiencing signs of overheating.

If energy effects and the housing market are excluded, inflationary pressures in the economy remain very muted, and the growth in credit certainly would not suggest overheating. Nevertheless, he said it is important that too much stimulus is not injected into the economy.

Power called on the Government to focus budgetary measures on improving labour supply and addressing the growing issue of deteriorating competitiveness for the business sector. Pressure to increase Government expenditure, he said, should be firmly resisted.

On the ongoing Brexit situation, Power stressed that budgetary policy should be guided by realities and not by the temptation to pander to populist pressures.

Stressing that the global economic outlook will remain bright, Power points to a number of dark clouds on the horizon.

He said the UK will be the slowest growing economy in Europe in 2019. Given Ireland’s reliance on this key export market, the risks posed by a hard Brexit are evidenced by the drop of 7.2 per cent in exports to the UK already this year. Emerging market imbalances are also an area of concern, as referenced by ongoing difficulties in Turkey and Argentina difficulties, he added.

On the domestic front, Power is optimistic that growth will continue but warned that consumer sentiment has plateaued. The Irish economy has continued to perform strongly in the first eight months of 2018 despite a softening of the growth in the Eurozone and the UK.

Power increased his GDP forecast for 2018 to 5.5 per cent, up from 5.0 per cent, adding that Ireland should comfortably see GDP growth of 4.5 per cent in 2019.