This article is from our January 2022 edition of MarketWatch.
26th January, 2022
Our new forecast is that Irish GDP (gross domestic product) grew by 15.5% in 2021. Once again, this ‘supercharged’ GDP growth seems a little bit too good to be true. The familiar story is that the multinational sectors are performing exceptionally well, particularly information/communications technology firms, pharmaceutical, and med-tech manufacturing companies.
We expect that exports have grown by an enormous 17% in 2021. This is despite global demand held back by the COVID-19 pandemic and supply-chain difficulties hurting industrial production globally. However, Ireland’s export sector has always been defensive, performing relatively well during recessions. Computer services exports were up 29% in the first three quarters of 2021. Similarly, modern sector industrial output, dominated by pharmaceuticals was up 37%.
Still, double-digit GDP growth rates are not the norm. Although the multinational companies operating in Ireland are clearly doing well, some of the expansion in their recorded output is artificial. One distortion has been the transfer of intellectual property assets, to comply with new OECD (Organisation for Economic Co-operation and Development) rules to reduce tax avoidance.
Hence, Irish companies ‘invested’ in €140bn of intangible assets in 2020 and a further €105bn in 2021. As these assets have been transferred into Ireland, the revenues associated with them have been counted as exports, inflating Ireland’s GDP figures. However, the OECD deadlines have now passed. In 2021, Irish companies have invested just €25bn into intellectual property. So these distortions could come to an end in 2022, leading to a more ‘normal’ GDP growth rate.
However, it would be wrong to dismiss Ireland’s economic performance as a statistical mirage. A striking development is that the level of employment is now 6% above pre-pandemic levels, whereas it remains below pre-COVID-19 levels in other countries.
The recovery in the labour market is also evident in falling numbers of Pandemic Unemployment Payment (PUP) claims, down from above 200,000 in June, to close to 100,000 at the end of September, to just 55,000 in early December.
It is true that a degree of statistical fog still surrounds the official Labour Force Survey (LFS), but the alternative Revenue PAYE measure shows that employment has fully recovered. The trend is also apparent in income tax revenues in the first eleven months, of €24.5bn, up 16% on 2019, helped by pay growth currently running at 5% per annum.
It also that appears that consumer spending has made a vigorous recovery – just 1% below pre-pandemic levels during the summer months. Further, November was the strongest month for credit/ debit card spending since the pandemic began. VAT receipts corroborate the positive story, €15bn in the first eleven months of 2021, up 24% on 2020, but also 2% higher than the same period of 2019.
Of course, one headwind for consumers is the pick up in energy prices and CPI (consumer price index) inflation. It is possible CPI inflation could rise towards 6% in early 2022. Thankfully, Irish households have saved through the pandemic – putting them in a good position to withstand the hit to their real incomes from rising prices. Indeed, Ireland is estimated to have had the second highest household savings rate in the OECD in 2020.
Nowhere is the buoyancy of the domestic economy more evident than in the public finances. Remarkably, we now expect that the deficit in 2021 will be just €5.8bn, or 1.3% of GDP. This is despite a high level of direct fiscal support for companies and households through the pandemic; such as the Emergency Wage Subsidy Scheme (EWSS) and the PUP. Of course, the explanation has been tax revenues have been buoyant, not only corporation tax, but also the incomes taxes, VAT, excise, capital gains and acquisitions.
Of course, the near-term threat to the Irish economy is the Omicron variant and possibility of extended restrictions into 2022. Clearly, many companies have had a difficult pandemic. The Central Bank of Ireland indicates €4.7bn of bank loans to companies and households received forbearance in the first nine months of 2021, of which 80% were business loans, especially concentrated in the real estate, hotels and restaurants and other service sectors.
It remains to be seen how many of these firms will be viable as the economy eventually exits the pandemic – and liquidations of indebted companies will inevitably rise. That said, with a small deficit, the government is in a good financial position to extend fiscal supports for firms, if needs be.
Residential Property Price Inflation (RPPI) accelerated to 13.5% in November. Whilst we expect RPPI inflation to slow in 2022 to 4.5%, most of the evidence points to the risk of stronger prices gains. The lack of housing supply is well known. There were just 11,300 properties listed for sale on MyHome in early December, a fresh record low.
However, the strength of housing demand often isn’t fully appreciated. The higher paid segments of the Irish labour market are clearly performing well, particularly the multinational sector, contributing to pay growth of 5.4% in Q3 2021. Hence, the average mortgage approval rose to €269,000 in November, up 8% on the year. In this frothy environment, there seems little prospect of a meaningful improvement in housing market conditions for homebuyers in the near future.