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Ireland’s economy seems to be in rude health, so why is everyone so pessimistic?

Edmund Heaphy
·Finance and news reporter
Leo Varadkar, Ireland’s prime minister, speaking at an event at the RDS Arena in Dublin. Photo: Stephen McCarthy/Getty
Leo Varadkar, Ireland’s prime minister, speaking at an event at the RDS Arena in Dublin. Photo: Stephen McCarthy/Getty

Ireland is expected to record the highest economic growth in the European Union this year—and the 2019 forecasts look robust. October saw unemployment levels reach lows not seen since February 2008. Retail sales are strong. And Irish households have an all-time record €103bn (£91bn) on deposit.

That, you’d think, would make Irish consumers and businesses buoyant about the future. Instead, business sentiment hit its lowest level since 2012 in the third quarter, while data released on Wednesday shows that consumer sentiment is close to a four-year low. The reason: Brexit. But that’s not all.

Last month, businesses overwhelming cited the prospect of a no-deal scenario as the leading cause of concern and, for the same reason, “Irish consumers have gotten a good deal gloomier of late,” said Austin Hughes, the chief economist of KBC bank in Ireland.

READ MORE: Brexit fears send Irish business confidence to lowest level since 2012

For one thing, International Monetary Fund forecasts suggest that, if no deal is reached, the dent to Irish economic output could be as much as for UK itself.

At another level, however, the contrast between the top-level statistics and how optimistic the Irish are speaks to a deeper mistrust of the data.

While the bumper GDP forecasts from Ireland’s Economic and Social Research Institute explicitly note that they are based on the assumption that Britain will strike a deal with the bloc, the head of the Irish Central Bank has expressed scepticism about the economic models that undergird the pessimistic analyses.

READ MORE: Bumper forecast for Ireland’s economy is based on Brexit deal optimism

Speaking to an Irish parliamentary committee in October, governor Philip Lane said that they “understate the negativity,” of a no-deal scenario, since they don’t take into account the likelihood of financial speculation.

In addition to noting the hit to Ireland’s exporters and the impact of a further fall in the value of the pound, analysts “must ask whether there will be a plunge in the stock markets” or a blow to bond markets, Lane warned.

READ MORE: Prospect of no-deal Brexit shapes Ireland’s 2019 budget

And while much has been made of the UK’s productivity problem, new research suggests that Ireland may be facing a productivity quandary of its own. A review conducted by the Nevin Economic Research Institute pointed to the burgeoning productivity of foreign-owned multinational firms, something that is concealing the relativity subdued output of domestic companies—and thus masking underlying weaknesses.

If that’s the case, everything from economic growth data to the country’s debt ratios—the country owes about €200bn (£176bn)–should be questioned.

Ireland will balance its budget for the first time in 2019 since the financial crisis and contribute €500m to a rainy-day fund, but the country still has some way to go before it can claim to have strong economic fundamentals.