Ireland’s economy appears in rude health despite contracting in GDP terms in 2024, a reflection of statistical distortions in the multinational sector. Inflation has come down quicker than anyone expected, employment remains at an all-time high (2.7 million) and the public finances are buoyant.
What’s not to like ... apart from a chronic shortage of infrastructure (most obviously in housing), a dysfunctional health service and an international outlook that is darkening by the day.
Armed conflict and trade tensions are flaring in several parts of the world, the economic consequences of which are, as yet, difficult to gauge.
For the last three decades, Ireland’s open, low-tax, export-led economy has surfed the globalisation wave like few others but it appears we are in a period of trade fragmentation.
Donald Trump’s re-election as US president raises the prospect of a trade war between the European Union and the United States, something that could have negative consequences for Ireland. Trump’s promise to impose blanket tariffs on all imports to improve the US trade balance and boost domestic manufacturing is exercising minds here.
Ireland’s exposure to such a protectionist pivot by the world’s largest economy is significant. It exports €54 billion of goods to the US every year and enjoys a €50 billion plus surplus on the bilateral trade. Ironically this surplus is largely a reflection of US-owned pharmaceutical companies selling products back into the US market.
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Would Trump’s tariff plan give US companies some sort of derogation? Perhaps, but Trump’s motivation is to onshore more US investment, not to facilitate it going to other countries, so giving US multinationals here a workaround would seem to be self-defeating from the US perspective.
“Despite negative commentary relating to Ireland from incoming members of president-elect Trump’s cabinet, we expect that US FDI [foreign direct investment] companies already located in Ireland will continue to hold a favourable view of their activities here,” says Davy chief economist Kevin Timoney.
“However, the pipeline for further FDI-led growth is likely to be negatively affected by the new administration,” he says.
Robert Kelly, the Central Bank’s director of economics and statistics, is more worried about potential reform of US corporation tax law to encourage US multinationals to repatriate intellectual property or patents domiciled abroad in countries like Ireland.
These, he noted, were “quite easy to move” and posed a potentially bigger threat to Ireland than tariffs.
While such threats tend to be seen through the prism of a potential shock to corporate tax receipts and the public finances, Timoney notes that the impact could also be felt through wages, with pharma and ICT workers now accounting for 14 per cent of all wages in Ireland.
Ireland has spent the last 14 years in the eye of a storm over international tax. But it keeps coming out on top.
The solution is to do what the Finnish, Swedish and Dutch do. New governments plan ahead. They agree some sensible speed limit for tax cuts and spending increases. And they stick to it. This is how we get off the rollercoaster of boom to bust, feast to famine
— Eddie Casey, chief economist at the Irish Fiscal Advisory Council
If you include the €14 billion in Apple tax money, it will collect in the region of €42 billion in receipts from corporate tax in 2024 (albeit some of the Apple money will come in 2025). And a new global minimum rate of 15 per cent combined with the exhaustion of capital allowances is expected to boost revenue further in the coming years.
Will a second Trump presidency end this winning streak?
Most commentators and agencies predict the economy here will grow at a modest but steady rate over the next two years – 3-4 per cent – driven by seemingly evergreen multinational exports and consumer spending. After a period of retrenchment, households can look forward to a period of real wage catch-up with nominal wage growth outgunning inflation.
Price pressures
“We expect real wages to grow 2.4 per cent in 2024 and by 3.5 per cent in 2025,” the ESRI says in its recently published winter commentary, noting these increases signify a “recovery in household purchasing power” amid the continuing decline in inflation. Price growth is expected to average just 1 per cent in 2025 but that doesn’t mean high prices are coming down, only slowing down.
These are, however, average figures and almost certainly don’t capture the “real feel” in the many households that continue to find themselves under the cosh in Ireland’s high-price economy.
Eurostat’s annual country-by-country price survey, which ranked Ireland as the second most expensive European Union member state behind Denmark, suggests citizens here are paying 42 per cent more for basic goods and services than the EU average. Irish wages aren’t 42 per cent above the EU average but we seem to pay over the odds for all manner of stuff: rent, electricity, insurance, eating out.
The dichotomy between headline economic metrics and what households are actually feeling was a theme in the recent elections, both in Ireland and the US.
Austin Hughes, author of the Irish League of Credit Unions’ consumer sentiment reports, says there is a central problem in economics with the use of average or median figures. “The idea that there is a ‘representative’ Irish consumer whose experience is mirrored across all households is not challenged enough,” he says.
High prices, from a business perspective, means high costs. And a big pressure point in the Irish economy appears to be hospitality, a sector that has seen its cost base rocket in recent years, resulting in a spate of high-profile restaurant closures.
After ruling out a return to the reduced 9 per cent rate of VAT in the budget, Fine Gael campaigned in the recent election on the back of a promise to reduce it to 11 per cent.
Adrian Cummins, chief executive of the Restaurant Association of Ireland, says “if nothing changes, we’ll see another 1,000 [SMEs] shut down” in 2025.
Minister for Enterprise Peter Burke maintains that for every one enterprise that fails, 10 new ones are set up and that Ireland continues to be a good place to do business. That message, from the perspective of SMEs, seems to be falling on deaf ears.
Either way, the economy seems to be in the grip of a negative cost/price dynamic that is alienating consumers and pushing many consumer-facing businesses to the brink.
It’s hard to see how our high-price culture can be pegged back. The incoming government has promised greater levels of investment in public services and infrastructure to ease bottlenecks. But while recent interventions have had some success in bringing down the cost of childcare, the cost of housing, a long-running sore, continues to accelerate, with property price inflation now back in double-digit territory.
This is expected to continue in 2025 with further European Central Bank interest rate reductions providing a tailwind.
To give you a sense of how corrosive that is for prospective buyers, it means the price of the average property bought and sold on the Irish market (those in the €400,000-€450,000 bracket) is now rising at a rate of roughly €3,500 a month.
“The ongoing scarcity of new housing supply has had a ripple effect, constraining the number of other properties entering the market. This dynamic is likely to endure or even deteriorate in the near term,” says Marian Finnegan, managing director of residential and advisory at Sherry Fitzgerald.
Planning
While our European peers worry about Covid-ravaged budgets and ballooning levels of public debt, we’re wondering how to spend a surplus. And while the Government’s favourable budgetary position is centred around highly concentrated corporation tax receipts, there are grounds to believe they will grow further with the introduction of new minimum 15 per cent tax rate and as companies exhaust various capital allowances.
“The excess corporation tax driving us into surplus is high risk. Most of it comes from three US companies,” says Eddie Casey, chief economist with the Irish Fiscal Advisory Council (IFAC).
Nonetheless, he agrees that it presents the State with unique opportunities. “We can put aside money that offsets future ageing pressures. We can make progress on the climate transition. And we can steadily tackle infrastructure deficits in housing, transport, electricity and health,” he says.
“The worry is that we do all this and more too quickly. If the next government does hit the pedal too hard, then we will probably just see more overruns, more delays and more bad value for money,” Casey says.
“The solution is to do what the Finnish, Swedish and Dutch do. New governments plan ahead. They agree some sensible speed limit for tax cuts and spending increases. And they stick to it. This is how we get off the rollercoaster of boom to bust, feast to famine,” Casey says.
IFAC has accused the Government of ratcheting up price pressures by pushing too much money back into the economy. Many of the cost-of-living measures went to households that perhaps didn’t need them.
In a pre-budget submission, IFAC claimed that successive breaches of the Government’s spending rule had already added €1,000 to yearly household expenses. The spending rule seeks to limit annual increases in public spending to 5 per cent, viewed as a sustainable rate for the economy. But the Government, despite warnings from IFAC, appears to have abandoned it.
“Domestic price pressures in things we can’t import easily are finally easing but they remain high. A risk is that budgets contribute further to this and Ireland risks becoming a country with an even higher cost of living,” Casey says.
Most forecasts relating to the Irish economy come with downside risks. Being a small economy heavily reliant on foreign investment has its occupational hazards. We have successfully motored through Brexit, the pandemic and more recently an energy price shock, with employment, arguably the most important metric, continuing to grow.
Continuing conflicts and trade tensions present all sorts of uncertainty for Ireland but, for now, the outlook remains relatively bright.
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