This article is from our July 2022 edition of MarketWatch.
29th July, 2022
Once again Ireland’s GDP (Gross Domestic Product) data are beating all expectations, but mainly on the back of the volatile and buoyant multinational sector. Irish GDP rose by 10.8% in Q1 2022, after a 6.2% contraction in Q4 2021. In light of this rebound, we expect that we will have to revise up our current forecast for 8.2% GDP growth in 2022 into double-digit territory.
These figures look a little bit too good to be entirely true. Clearly, companies in the information/ communications technology, pharmaceutical and medical technology sectors are performing very well. Indigenous firms have faced a far more challenging couple of years with all the disruption from the pandemic. However, in aggregate, Ireland’s economy is clearly performing well – evident in the labour market and buoyant tax receipts.
Given the uncertainty created by the conflict in Ukraine and surge in energy prices, a recession in Europe clearly can’t be ruled out. One reassuring feature of Ireland’s economy is that the export sector is highly defensive. Ireland’s exports are not concentrated in highly cyclical, heavy manufacturing and capital goods production. Similar to during the COVID-19 pandemic period, Ireland’s export sector should prove to be relatively resilient should a substantial global downturn take place. It is worth
highlighting how strong Ireland’s labour market has performed. According to the latest data from the Central Statistics Office for Q1 2022, the level of employment is already 8% above its pre-pandemic level, with the unemployment rate falling to 4.7% in April.
Numbers employed in the information/communication (30%), industrial (10%), finance (17%) and professional & scientific (18%) sectors are all well above 2019 levels, more than compensating for domestic facing sectors such as retail, hospitality, services and tourism that were hard hit by COVID-19. This is a far better performance
than other countries where employment is just getting back to pre-pandemic levels.
Of course, Ireland will still need to withstand the headwinds facing many economies. HICP (Harmonised Index of Consumer Prices) inflation hit 8.2% in May as Irish energy companies passed on higher energy costs into electricity and gas prices. We expect that inflation will have peaked around 8.5% in June. This means consumer prices are rising faster than wages – hurting the real spending power of Irish households. Surveys of consumer confidence fell in early 2022, close to the troughs seen in early 2020 during the first COVID-19 lockdown.
However, once again, Irish consumers may be relatively well placed to deal with the squeeze in real incomes. Job growth over the next twelve months will likely be stronger in Ireland than in Europe or the United Kingdom. The Irish government also implemented income tax cuts in January, worth close to 1% of disposable incomes on the average wage.
Finally, Irish households have been conservative. The household savings ratio was 10.4% in 2019, before rising to 25% in 2020 and 21% in 2021. These accumulated savings will allow many households sustain spending, despite higher prices. Indeed, we estimate Ireland’s household debt / disposable incomes ratio has now fallen
to 96% below the euro area average for the first time – indicative of the prolonged process of balance sheet repair since the Celtic Tiger era.
Residential property price inflation (RPPI) hit 15.2% in March. There have been few material signs so far of any slowdown but this rate of inflation isn’t sustainable. We expect RPPI will slow to 7% by the end of 2022, as stretched affordability and the Central Bank’s mortgage lending rules inevitably curb further price gains.
The prospect of rate hikes from the European Central Bank (ECB) may also create uncertainty for homebuyers. However, debt-interest payments on Irish mortgage lending are currently low by historical standards. The Central Bank of Ireland has also estimated house prices might have been 25% higher absent the 3.5 times threshold on loan-to-income ratios because homebuyers would have taken on more debt were it not for the mortgage lending rules. In this context, ECB rate hike won’t help affordability, but will likely do little to curb housing demand.
Potential support for the cost of living "crisis" Ireland’s buoyant economy has been evident in the public finance data. Tax revenues in the first five months of 2022 were €30bn, up 27% on the same period of 2021. Whereas other European countries have run substantial fiscal deficits in the twelve months to May, Ireland’s central government exchequer balance actually ran a small €32m surplus. This raises the prospect of a "giveaway" Budget for 2023 – especially with the government under
pressure to help Irish households with the cost of-living "crisis". However, the government should ideally eschew broad based tax cuts and focus any measures on the most vulnerable households. A cautious approach in Budget 2023 is warranted to avoid the government’s fiscal position adding fuel to growing inflationary pressures in the Irish economy.
The Irish Fiscal Advisory Council (IFAC) has also warned that corporation tax receipts look unusually strong and are an unpredictable and volatile base on which to base medium-term spending decisions. In the twelve months to May, corporation tax receipts were €17.5bn, up enormously from €11.8bn in 2020 and well above the Department of Finance’s past projections. Recommendations that these unexpected receipts should be ring-fenced to pay down debt have so far fallen on deaf ears.