This article is from our October 2022 edition of MarketWatch.
14th November, 2022
We have recently revised our forecast for Irish GDP (Gross Domestic Product) growth in 2022 upwards to 8.7%. Once again, Irish export growth has beaten expectations, reflecting the buoyant multinational sector. However, the tailwind from relaxed COVID-19 restrictions has also helped activity in indigenous sectors. Notably, despite fears of surging energy prices and double digit CPI (Consumer Price Index) inflation, Irish consumer spending grew 1.8% in Q2 2022, as households spent more on services.
The economy clearly had enormous momentum in early 2022. Employment rose by 2% in the first half of this year to a fresh high of 2.55 million, an exceptional performance. Remarkably, the level of employment is now already 8% above pre-pandemic levels, the labour market benefitting from inward migration flows and rising participation. Hence, not only corporation taxes but also the performance of income taxes and VAT have beaten budgetary expectations and a budget surplus is now likely this year.
However, clouds are now on the horizon. Both the Euro area and UK economies are expected to be in recession by the end of the year. The uncertainty created by the war in Ukraine was always likely to hurt investment. However, the closure of the Nord Stream 1 pipeline has led to the worst-case scenario for energy supply being realised. As in other countries, Irish households will now inevitably be hit by rising energy bills this winter, likely leading them to rein in spending.
Hence, we have recently revised our forecast for Irish GDP growth in 2023 down to 3.5%.
There are already signs that activity is slowing down. Ireland’s manufacturing (51.5) and services (54.7) PMI (Purchasing Managers Index) readings have softened in recent months. The construction (46.9) PMI has pointed to a contraction in the sector for several months, particularly exposed to supply-chain disruption and cost pressures. Ireland’s unemployment rate hit a fresh low of 4.3% in August. So some slowdown in the breakneck pace of jobs growth was inevitable as labour shortages were eventually felt. Notably, the Central Statistic Office’s measure of employees derived from Revenue tax data, though often volatile fell 0.3% in June and 1.2% in July. We still expect that Irish employment will still rise by 1% in 2023.
Crucially, we expect the export sector will continue to perform well, helping to keep Irish GDP growth in positive territory. Our forecast is for Irish exports to grow by 7% in 2023, helped by the buoyant multinational sector, but also by their defensive nature concentrated in agri-food, information and communications technology, medical-technology and pharmaceuticals.
This protection from the export sector was very much evident in 2020. Despite a near "double digit" decline in global trade that year, Irish exports managed to expand by 14% in 2020. This performance didn’t entirely reflect multinational companies. The traditional manufacturing sector saw output expand by 6.7% in 2020.
The average household energy bill looks set to rise to close to €4,000 from early October, up from circa €2,000 in just twelve months and likely pushing Irish CPI inflation into double-digit territory. This represents an enormous hit to households’ purchasing power. It should be remembered that CPI inflation, excluding energy, was 5.9% in August – so a broad range of price rises are being felt.
Dealing with cost-of-living issues was clearly the main focus of Budget 2023’s enormous €11bn package, worth 4% of gross national incomes. This included €4bn to support households this winter. For example, €600 of electricity price credits and a range of double, or once-off, welfare payments will be made this winter. In addition, income tax changes will add €831 for all those earning €40,000 or above. The key social welfare payments will rise by €12 per week. There is also the €500 rent credit. The strategy here was clearly to help a broad range of households.
Businesses will also receive help with their energy bills for the next six months. A new scheme will meet 40% of the increase in firm’s energy bills up to a cap of €10,000 per month and is expected to cost just over €1bn.
However, Budget 2023 was far less forthcoming on how public services will be maintained in the face of cost pressures. These pressures could lead to spending over-runs. Crucially, the government has secured agreement, albeit not yet ratification on the new public sector pay deal.
However, the budget for capital expenditure was left unchanged in Budget 2023, despite clear construction cost inflation. Implementation of the National Development Plan (NDP) could well be one casualty of the cost and Budgetary pressures now emerging.
Nonetheless, we believe the official Department of Finance projections for the Budget balance in 2022 are too conservative given the buoyant performance of tax receipts so far this year. We expect the Irish government will run a surplus of €3bn (0.7% of GDP) in 2022, rising to €8bn (1.6% of GDP) in 2023. Of course, these projected surpluses could be diluted if high energy prices persist and Irish politicians decide to provide further support to households’ incomes in 2023.
MyHome asking prices fell by 1% in Q3 2022 with the annual rate of inflation slowing to 7.8%. It now seems clear that stretched valuations, economic uncertainty, and the prospect of the ECB raising rates rapidly in the coming months are finally starting to be felt. We expect that Irish house prices will rise by 6% in the year to December 2022, slowing from current double-digit rates of inflation.
A key point here is that Irish house prices have been held back by the Central Bank’s mortgage lending rules. Leverage and debt service ratios on new lending are still at historically low levels. So housing demand should stay resilient, despite ECB rate hikes. There is also enormous pent-up demand. So we expect Irish house prices are unlikely to see persistent price falls and will rise by 3% in 2023.