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January 7 2018 6:00 PM
Consumer spending will be key to the growth of the economy in 2018, with some evidence that sentiment among businesses is more subdued, according to Bank of Ireland group chief economist Dr Loretta O'Sullivan.
The bank had forecast GDP growth of 3.8pc for the year ahead but expects to revise that figure upwards in the coming weeks.
"It's really a continuation of the story that we've seen for the last while," said O'Sullivan. "So ongoing recovery in the domestic economy, against a backdrop of an unsettled external environment. Consumers are back spending and I think it's very important that we now have more than two million people in work."
She expects the unemployment rate to come down to around 6pc, which will further support consumer spending.
O'Sullivan, who has a PhD in housing and previously worked in the Department of Finance, is mindful of the fact that there are uncertainties in the external environment. But she is encouraged that the euro area economies - important trading partners for Ireland - have been growing better than expected.
"The US is growing and there may be a bit more to come there if President Donald Trump's stimulus package goes through and if he gives a little bit of a boost to the US economy."
She agrees that Brexit is 'a cloud on the horizon' but again the UK economy is growing at around the 1.5pc mark.
O'Sullivan, who became the bank's chief economist almost four years ago, has been on customer roadshows in recent weeks and months and has seen firsthand that businesses are highly engaged with Brexit and the uncertainties around it.
"Concerns differ for firms depending on their own circumstances. For some firms it is a case that they're concerned about the exchange rate, it's moved quite a lot, they're not as competitive now when they're selling into the UK market.
"For firms that are up around the Border, some of them are concerned around cross-border shopping. Some are looking at the fact that they travel back and forth across the Border 10 times a day. And for other firms the issue is the UK being the land bridge to Europe and if they can't go through the UK, do they have to go around it?
"They are all trying to process that at the moment and we see that weighing a little bit on business sentiment in our research where while the consumer is edging up the business sentiment has been a little bit more subdued."
The US and the impact of Donald Trump has also weighed on people's minds, but O'Sullivan is less concerned about that as time has passed.
"When he got elected people were caught unawares. You see in November 2016 a big dip in sentiment again amongst households and amongst firms."
The bank's research has shown that fears over the implications of Trump's presidency had fallen back significantly. "A lot of that is to do with the fact that there's been more bark than bite, there's been a lot of talk and not a lot of policy action or delivery in implementation."
Another issue which has been flagged as a potential headwind for Ireland is EU moves on tax, with concerns that the Irish 12.5pc corporation tax may be in the sights of policy makers.
"The OECD has really been leading the charge though and trying to put a framework around this and a lot of things have happened in that context. From an Irish perspective it's certainly something again that we would be watching."
But Britain's exit from the US means Ireland will have to re-evaluate its position in Europe. "Ireland will need to think about its own relationship now in a European context. So where it would have had the support and had many similarities in terms of policies with the UK, with the UK out of the mix it's going to have to look wider and think about forming new alliances."
O'Sullivan expects housing to continue to be a pressure point for some time to come in the local economy.
"This is economics 101, it is a supply demand mismatch - we're not building enough to meet the demand that we have for housing. And the upshot of it is that it's coming through in terms of the prices and spilling over into the rental market. There has been an uptake in completions and more supply is coming on stream, but it's coming from a very low base."
However, she is supportive of the Central Bank restrictions on lending. "I think it's an important anchor that we were missing before," said O'Sullivan, who is from Dublin. I think having the macro prudential piece is important because it provides a local means of anchoring or stabilising a situation."
"When you think about the market now it is notable that it is not really credit driving it so we are in a different situation to where we were previously where it was very much a credit fuelled property boom. Now roughly half the market is cash buyers so, you know, we have seen some uptake in credit but we're not where we were before."
While there can be a pre-occupation with the property market in media commentary, O'Sullivan points out that in many parts of the country, the lack of broadband is the most prominent concern.
"In Connacht and Ulster, housing is important but more important is telecommunications."
Other infrastructure shortages including transport are significant issues and O'Sullivan believes the Government will feel pressure in relation to this in 2018.
"We're starting to move into that space where we're thinking about economic growth being important, not just for the sake of the economy growing but because it gives us more resources, because it allows us to do more in terms of welfare, in terms of living standards.
"So I think we're seeing a little bit of a shift from that pure economy 'back on its feet' piece into a little bit more now the societal aspects.
"I think the housing piece has been an illustration that we're beginning to think now a little bit what type of a society do we want to live in. And I think you're going to see some of the tensions play out around the public finances and infrastructure."