This article is from our April 2023 edition of MarketWatch.
02nd May, 2023
The news that Irish GDP (Gross Domestic Product) grew by 12% in 2022 was greeted with scepticism, as ever, skewed by buoyant exports and the multinational sector. However, there is no denying that employment grew by 2.7% to a fresh record high of 2.69 million. This means that Irish employment is now 9% above pre-pandemic levels, a feat that no other European economy has come close to.
Despite a very challenging global environment, Ireland continued to attract a healthy flow of foreign direct investment last year. Employment in the multinational sector grew by 9%, or by 24,000 jobs to 301,500. Notably, 60% of these additional jobs didn’t come from the information, and communications technology (ICT) sector, but from pharmaceuticals, medical technology and business/financial services firms.
Ireland was also one of just a couple of OECD (Organisation for Economic Co-operation and Development) countries to run a budget surplus in 2022, of €5bn, or circa 1% of GDP. This gave the coalition government flexibility to implement tax cuts, the €200 energy price credits and one-off social welfare payments to help households with higher energy bills. Ireland’s strong fiscal position has been recognised by bond markets, with 10-year yields trading through France and now close to triple-A rated Netherlands.
The one sector that has been vulnerable to higher interest rates and cost inflation has been construction. Ireland’s construction PMI (Purchasing Managers' Index) moved below the 50 no-change level in the second half of 2022 as viability issues led to the flow of apartment and office development starting to dry up. This could still be a challenge in 2024 and beyond. That said, housing completions rose close to 30,000 in 2022, still not sufficient to satiate pent-up demand, but well ahead of expectations.
Irish energy companies announced a flurry of price increases throughout last summer, so the average household energy bills were expected to have almost doubled, to above €4,000 per annum. This helped push Ireland’s CPI inflation rate to a peak of 9.2% in October, falling only to 8.5% in February, and presenting a sharp squeeze on real incomes.
Thus far, Irish consumer spending has been relatively resilient, up 1% in Q4 2023, with core retail sales volumes rising 0.4% in the three months to February. Jobs growth, income tax cuts and government supports have helped. However, Irish households may still be adjusting to the sharp rise in their energy bills.
That said, Ireland’s household savings ratio was still 20% at the end of 2022. This is a far healthier buffer for many households to use to sustain spending in 2023. In contrast, in both the UK and the US, household savings have already been cut back sharply, with many consumers turning to credit card debt. This is a worrying trend and not sustainable in the medium term.
Of course, one reason for the optimism is the recent collapse in wholesale energy prices, trading close to €40 per megawatt per hour in March. Depending on when these lower wholesale prices are passed through to retail prices, CPI (Consumer Price Index) inflation could fall rapidly.
In the UK, the direct regulation of retail energy prices by OfGEM (Office of Gas and Electricity Markets) means that the average household energy bill is expected to fall back to £2,150 in July. However, the timing for Irish households’ energy bills is far less certain. Taoiseach Leo Varadkar has threatened windfall taxes on Irish energy companies if retail energy prices are not cut in the near future.
Expectations for the Irish economy for 2023 had been relatively subdued. There has been no lack of headwinds; the Ukraine war, tightening monetary policy by Central Banks and of late, the uncertainty in the banking system.
However, as in previous downturns, Ireland’s defensive export sector, with little exposure to highly cyclical sectors such as heavy engineering, capital goods or car production, should provide some protection should global demand deteriorate.
Perhaps what is different this time is the slowdown in the ICT sector, evident in high-profile job cuts in Facebook, Google and other technology firms. Many of these firms had hired very aggressively during the COVID-19 pandemic as the digitisation of advertising, communications and media accelerated, but they are now cutting back.
However, the quantum of announced job cuts in Ireland’s ICT sector is still very small. There have been winners and losers in the sector. Some firms are still set on expansion. The American Chamber of Commerce recently reported that two-thirds of US companies operating in Ireland still expect to increase their staff numbers over the next twelve months.
Irish residential property prices rose by 7.7% through 2022. However, asking prices have fallen back in recent quarters. This suggests a degree of froth built-up in the housing market, leading to stretched valuations which are now correcting. This was particularly the case in Dublin where house prices have already declined by 2% between September and January.
However, the housing market remains extremely tight with little let-up in demand. In addition, by its own estimates, the Central Bank’s surprise decision to loosen the mortgage lending rules could eventually add 8% to house prices. This may be already evident in mortgage approvals data. The average first-time-buyer approval rose by 2.3% in February to a fresh record high of €281,350.
Of late, the Irish government is now considering fresh policy initiatives to address problems in the housing sector. Specifically, tax changes to help stem the exodus of buy-to-let landlords, but also measures to ease the acquisition of such properties by local authorities, with tenants in situ.
However, intransigent problems remain. Capacity problems in An Bord Pleanala and Irish Water are clearly holding back development. In January, Minister Darragh O’Brien published draft legislation intended to streamline the planning system. However, the Irish Planning Institute has already criticised the plans as ‘unworkable’.
Generally, the Irish Fiscal Advisory Council (IFAC) has criticised the lack of clarity on spending for the National Development Plan, the rollout of the Slaintecare primary care system and Climate Action Plan. Notably, planned public capital spending in October’s Budget for 2023 was left unchanged at €12.4bn, despite clear build cost inflation.
In short, the key threat to Ireland’s fortunes may not be external, but the risk that public investment will fail to address the growing evidence of bottlenecks and cost pressures in the economy.
This article is from our April 2023 edition of MarketWatch.
Warning: Forecasts are not a reliable indicator of future performance.
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