Irish economic outlook

We recently revised down our projection for Irish GDP (gross domestic product) growth to 5.5% in 2023. However, once again, the reasons are volatile data and revisions related to the export and multinational sectors. According, to the Central Statistics Office, Irish GDP contracted by 4.6% in Q1 2023, but this entirely reflected the industrial sector, with monthly data suggesting activity had fully rebounded in April.

Conditions in the multinational sector remain robust

However, activity in Ireland's main export markets could slow as the impact of central bank rate hikes is felt. In June, Ireland's Purchasing Manager's Index (PMI) for the manufacturing sector fell to 47.3, a three-year low and indicating contraction. Smaller indigenous manufacturers are likely seeing tough conditions at the moment. 

That said, the Industrial Development Authority indicated that in the first half of this year it had attracted 135 fresh investments into Ireland, potentially adding a further 12,000 jobs, down on the 18,000 jobs in 2022's exceptionally buoyant figures, but still close to pre-pandemic levels. 

Similarly, a recent survey by the American Chamber of Commerce found 70% of its client US firms expected to expand employment, with only 7% planning to cut back staffing levels. 

The broad impression is that, despite a slowdown in some parts of the ICT (Information and Communications Technology) sector, investment in the multinational export sectors remains robust, particularly in life sciences.

Domestic economy expanding rapidly

We had expected some slowdown in the Irish domestic economy through the turn of the year as households grappled with the hit to their incomes from higher energy bills and elevated CPI (Consumer Price Index) inflation.

However, there has been precious little sign of any slowdown in Ireland. Employment grew by 1.9% in the first quarter to a fresh record high of 2.62 million, now 12% above pre-pandemic levels. Initial indicators on employee numbers suggest this frantic pace of job creation continued into the second quarter of this year. 

Irish households were hit by sharp electricity and gas price hikes, which we expected would hit home last winter. Of course, Budget 2023 measures such as energy price credits and tax cuts have helped. Nonetheless, the fact consumer spending grew by 1.6% in Q4 2022, followed by a further 1.7% rise in Q1 2023, was ahead of all expectations. 

Hence, despite revising our forecast for GDP growth down, the reality is that the domestic economy has been expanding at a red-hot pace. Hence, our forecasts for employment (4.2%), consumer spending (5.3%), modified domestic demand (3.4%), and indigenous sector output (4.9%) growth in 2023 have all be revised up. 

Capacity pressures will soon hold back growth 

Whilst the recent performance of the Irish economy is clearly welcome, there is no doubt that capacity pressures and bottlenecks are being increasingly felt. Hence, our forecasts are slower for GDP growth (4.5%), employment (2%), and modified domestic demand (2.5%) in 2024.

In the labour market, the unemployment rate is now 3.8%, close to a historic low. However, the participation rate is now at a record high. The CSO estimates that the population aged 15+ grew by 3% in the twelve months to March, helped by large inward migration flows. However, this rapid pace of job and labour force growth cannot continue indefinitely as labour shortages become more acute. 

Of course, the pressure on the supply capacity of the Irish economy is also being felt in other areas; energy supply, infrastructure, and crucially, housing. 

House price infaltion softening, but underlying shortage remains

Frothy valuations built up during the COVID-19 pandemic always meant some house price correction was likely as interest rates rose. This has clearly been the case in Dublin, where the Residential Price Index has fallen for seven consecutive months, down 3.6% since September's peak.

However, we still expect residential property prices to rise by 1.5% in 2023. In contrast to other countries, the surprise loosening of the Central Bank's mortgage lending will likely add to pricing in the second half of 2023. 

For example, in May, the average mortgage approval was €297,000, up 3.8% on the year. This is a very different picture to the UK, where a more severe credit squeeze is reducing the amount that homebuyers are borrowing. 

There has been better news on homebuilding levels, with 30,900 completions in the twelve months to March. This is well ahead of most projections, and despite rising fears that input costs would hurt viability. Hence, we have revised up our forecast for completions in 2023 to 29,800. 

What to do with the buoyant public finances?

We expect the government will run a €12 billion surplus, worth 2.2% of GDP in 2023. This reflects the buoyant public finances, with tax revenues in the first half of 2023 up 11% on the year to €41 billion, indicative of the rapidly growing economy.

In July, the Summer Economic Statement (SES) announced that the government will present a €6.4 billion package in October’s Budget for 2024, split between €5.2 billion of extra spending and €1 billion of tax cuts. This move will surely attract criticism from the Central Bank of Ireland, the Economic and Social Research Institute, and the Irish Fiscal Advisory Council in that the government risks over-heating the economy.

The government had adopted a fiscal rule to limit core expenditure growth by 5% per annum – to help safeguard the public finances. However, it now plans to grow core spending by 6.1% in 2024, following on from expected growth of 7.4% in 2023 – breaking its own rule for a second successive year.

Our forecasts imply that the debt/GDP ratio will fall to 39% in 2024, or 77% of GNI (gross national income), a relatively safe level. However, there is still the risk that Ireland is too reliant on potentially volatile corporate tax revenues.

Hence, Ministers for Finance and Expenditure Michael McGrath and Paschal Donohoe have proposed that the government invest almost the entire expected surplus in 2024, up to €12 billion per annum, in a new sovereign wealth fund. This fund is intended to help meet costs from the aging of the population, climate change, and infrastructural investment needs.

However, political pressure for an even larger giveaway in October could well grow through the summer, especially as it may be the last budget before the next general election. If so, well-intentioned plans to save Ireland’s buoyant but potentially unstable corporate tax revenues could still fall by the wayside.