Esther An

This article was first published in the January 2015 Ireland edition of Accounting and Business magazine.

It is somewhat hard to believe that 12 months ago we were about to enter a new year with a certain amount of trepidation. The economic recovery was still fragile, government debt levels were still rising, and Ireland was facing into a situation where it was raising financing on the market without any external backstop for the first time since 2010. 

Looking back, it appears that there was no need for concern. First, the economy is now the fastest growing in Europe, with GDP expected to expand by 5 per cent in the full year. Second, debt levels have started to decline. Third, not only were sales of Irish debt well oversubscribed throughout the year, but interest rates have tumbled to record lows. 

There is clearly now significant momentum in the Irish economic recovery. While there are some concerns about the scale of growth due to potential statistical issues related to exports, it is clear nonetheless that the Irish economy is one of the fastest growing economies in Europe. This momentum is likely to be sufficient to ensure that this position is maintained in 2015 too.

Net trade and investment

In the context of a continued moribund growth performance in the euro area, the trajectory of Ireland’s economy is increasingly being viewed with a sense of wonder. However, its performance can be explained largely by two important factors. 

First, net trade has been able to make a contribution due to Ireland’s heavy exposure to the growing UK and US economies, as well as its large exposure to niche growth sectors such as information and communication technology. 

Second, and more importantly, the domestic economy is being led by a strong rebound in investment spending. This followed a calamitous fall over the 2007–12 period, mainly due to problems in the construction sector. Similar to other economies that have gone through investment busts in the past, Ireland is now in the process of a recovery that should see investment spending return to more ‘normal’ levels in the coming years. Due to the scale of decline, which saw investment falling to record low levels, investment might grow vigorously in the early stages of recovery. 

This will continue to be a feature in 2015, with an improvement in credit availability expected to make more of a contribution to both business and construction spending. So far, one can largely describe the investment-led recovery as credit-less, although there are more positive signs emerging on this front. 

Ireland’s financial future

Ireland faces very different challenges going into 2015. With the economic recovery now clearly more entrenched, one of the key domestic challenges will be to manage expectations of the public. After a record period of austerity and thus hardship for many, fatigue was bound to set in. However, one gets the impression that expectations have flipped in the opposite direction very quickly, partly due to a government belief that it must do something to reverse the trends in its popularity rating. 

Budget 2015 is a clear example. One concern is that the election year Budget, to be announced next October, will be even more influenced by popularity-seeking measures. 

Another important domestic issue is to ensure that the gains in competitiveness that have been hard-won over recent years are safeguarded, namely by ensuring that wage and other cost pressures do not develop to a significant extent. There are already nascent signs that power is shifting from employers to employees, particularly in some of the more important sectors for foreign direct investment. 

The key risk to Ireland going into 2015, though, is external. While Ireland has been able to decouple from the rest of Europe recently, the region is still the biggest destination for Irish exports. More importantly, ongoing concerns about deflation will undoubtedly bring debt sustainability back into market focus.

Dermot O’Leary is chief economist of Goodbody, Dublin.