Mid Year Economic Review 2024 with Jim Power
An Assessment by Jim Power, Economist
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The views expressed in this article reflect those of Jim Power and are for informational purposes only. They do not represent the views of Aviva. Jim Power’s views may change.
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Key Points
With the mid-point of the year imminent, there is a greater sense of optimism about global economic prospects than was the case a year ago. Inflationary pressures continue to gradually ease; interest rates have started to come down in some jurisdictions, including the ECB, and further monetary easing will be seen in most central banks over the coming year. Energy and food prices are also lower.
- Global geo-politics represents the key threat to the global economy over the coming years. The war in Ukraine is ongoing; the war in Gaza is ongoing; the relationship between China and Russia is being strengthened; the relationship between China and Russia on the one hand, and the United States and the west is generally deteriorating; and political polarisation is intense around the world. Political events do have economic consequences.
- 2024 is a big year for elections, with over seventy occurring around the world. There were European and local elections in Ireland in early June, and a general election before March 22nd 2025; the UK election is on July 4th, with Labour set to win a significant majority; Modi had a poor election in India, but will stay in power; and the most significant of the lot will be in the United States on November 5th. Growing nationalism and protectionism and the ongoing assault on global free trade defines much political discourse now.
- The ECB cut interest rates by 0.25 per cent at the June 6th meeting. Further gradual easing is likely over the next 18 months. The easing cycle is likely to be a slow and gradual process. It is not likely that rates will go back to the historical lows of recent years, but the ECB could trim around 1.5 per cent off its rates over the next 18 months.
- The Irish economy continues to perform at a reasonable pace in 2024. GDP expanded by 0.9 per cent during the first quarter, meaning that the technical GDP recession ended.
- The labour market remains tight, with record levels of employment of 2.704 million at the end of Quarter 1, and unemployment at 4 per cent in May. Tax revenues are also holding up quite well, and the export performance is rebounding after a sharp post-Covid reversal in 2023, in the pharma sector. Consumer spending is under some pressure due to cost-of-living pressures. The SME sector is challenged.
- Notwithstanding the challenges from softer consumer spending and a challenged SME sector, the outlook is good for the next 12 months. Inflation is likely to average around 2 per cent this year, while wages are likely to increase by around 4 per cent; interest rates have started to come down and will likely fall further over the next 18 months; fiscal policy is very expansionary, as manifested in a very significant Budget 2024 package, and another similar package in Budget 2025; and the global outlook is reasonably positive.
- Budget 2025 is due in early October. It will be the last budget before a general election (which must be held by 22nd March 2025), so there will obviously be a strong temptation to deliver a generous budget. The Minister for Finance has indicated that there will be a significant income tax package in the budget. This is likely to include a widening of tax credits, a widening of USC bands, and a significant increase in the standard rate tax band, meaning that workers will enter the top tax band at higher income levels. This was a strong feature of Budget 2024. There will also be significant increases in public expenditure.
- Ahead of a general election and given the pressures on health, housing and the cost-of-living, the advice for fiscal caution from IFAC is likely to be ignored. Budget 2025 is likely to be another large package, probably more than €14 billion.
- Budget 2025 is due in early October. It will be the last budget before a general election (which must be held by 22nd March 2025), so there will obviously be a strong temptation to deliver a generous budget. The Minister for Finance has indicated that there will be a significant income tax package in the budget. This is likely to include a widening of tax credits, a widening of USC bands, and a significant increase in the standard rate tax band, meaning that workers will enter the top tax band at higher income levels. This was a strong feature of Budget 2024. There will also be significant increases in public expenditure.
- Between August 2016 and February 2023, average motor insurance prices fell by 43.3 per cent. However, the decline bottomed out in the first quarter of 2023 and costs have subsequently trended upwards. Between February 2023 and April 2024, average motor insurance costs have increased by 6.3 per cent. High claims and increased repair costs are impacting.
- The household balance sheet is in a very strong position. In March 2024, household deposits totalled €154.6 billion, and household credit outstanding stood at €101.5 billion. This is in marked contrast to the situation in 2007 when credit outstanding far exceeded household deposits. The situation pivoted in 2015, due to a strong economy and the Central Bank regulation of the mortgage credit market. This is a very positive fundamental factor for the personal sector.
- Housing remains the most significant challenge facing policy makers. The recent report from the Commission on Housing suggests that as of the 2022 Census, there was a housing deficit of between 212,500 and 256,000 homes. The basis for this deficit is obvious from the low level of housing construction in the decade after 2008; a largely static household size over the same period; low levels of availability of rental and owner-occupied housing; and high rates of homelessness.
- In 2023, 32,626 residential units were completed. However, between 2011 and 2023 annual completions averaged 15,043 and hit a low of just 4,575 in 2013. This is despite rapid population growth. It will take some years to satisfy actual and latent demand, but everything possible needs to be done to increase supply as quickly as possible.