All the main forecasters – at home and internationally – believe the extraordinary growth run of the Irish economy, briefly interrupted by Covid lockdowns, will end in 2023, with consumer spending and investment in some sectors already slowing in the final months of the year. But there are some important factors supporting the economy this year. Here are five of them.
1. A record low unemployment rate: The Irish jobs market seemed to turn in the middle of the year, with total employment flattening out, or perhaps declining, a little. It is difficult here to disentangle slowing hiring plans and lay-offs in some sectors with ongoing labour shortages in others when trying to interpret the overall figures. But there is no doubt, with the unemployment rate below 4.5 per cent, the jobs market remains tight. This looks likely to change slowly but surely in 2023 as tech lay-offs take hold and domestic businesses are hit by the cost-of-living crisis, but at least the starting position is good.
2. A big wad of cash savings: Consumer spending is falling in real terms as people’s money is not going as far as it did. The actual volume of goods and services consumed has been dropping now for about six months – more money spent on essentials like energy and food is leaving less for other items. But post-Covid many households still have substantial cash in the bank. Savings went over 23 per cent of income during 2020 before falling to 21 per cent last year and 19 per cent in the earlier part of 2022 – probably falling in recent months due to the impact of inflation. This compares with 11.5 per cent pre-pandemic.
Central Bank research suggests the bulk of the savings are in higher income households – and many lower income ones may already have had to dip into what spare cash they had in recent months. Total household deposits are now in excess of €170 billion, one-third above their pre-pandemic level. A significant portion of the additional Covid-era savings could be defined as excess. Many households have cash to fall back on and this should provide some support consumer spending in 2023.
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3. The pharma sector: There has been a lot of – justifiable – talk about the impact of the tech downturn on Ireland, with threats to jobs and a likely impact on corporate taxes as profits in the sector are squeezed. This will be one to watch for 2023. However, so far there are no similar signs of distress from the other sector which is the vital contributor to the corporate tax take – the wider pharma industry also including life sciences and medical technology companies, where some 80,000 people are employed. While these companies are low profile, the likes of Pfizer and Merck are also thought to be among the big corporate taxpayers, as well as being significant employers. Tax on profits earned during Covid are believed to be one reason why corporate taxes surged this year. Among the big jobs announcements this year have been Eli Lilly, Janssen Sciences and AstraZeneca, which together will provide more than 1,000 new jobs. With tech under pressure, Ireland needs this sector to hold in.
4. Exchequer awash with cash: The flow of money into the exchequer has been extraordinary over the past couple of years. A landmark moment this year was the massive flood of tax in November – the biggest month each year for tax payment – which left the exchequer surplus at an unprecedented €12 billion plus for the first 11 months of this year. This will fall sharply in December – as departments hurry the spending of cash before the end of the year – but the Economic and Social Research Institute (ESRI) still, conservatively, estimates an annual surplus of €3.5 billion this year and €6.5 billion next year. This is after the State sets aside €2 billion this year and €4 billion next year in a new National Reserve Fund. So there is a lot of leeway in the short-term budget position – which would, for example, allow the Government to extend energy and cost-of-living supports to households and businesses later into next year if that is needed. In terms of cash, the exchequer is also in a strong position, with the National Treasury Management Agency holding €27 billion in reserves and only planning to raise €7 billion next year. It has borrowed heavily at low interest rates in recent years, locking in borrowings at very low fixed interest rates.
5. Two positives on corporate tax: There is no doubt that Ireland’s reliance on corporate tax is a source of exposure to the economy, given the small number of companies paying large amounts of tax. However, while lower profits in tech – and more generally due to the world recession – will affect revenues next year, it is not all bad news. Big tech and pharma multinationals have been benefiting from tax writedowns on big intellectual property investments moved here after 2015. These will now start to run down – so while total profits being earned may fall, a larger proportion of what is earned will be exposed to tax. Also, from 2024, a new 15 per cent tax will apply to the taxes of the largest companies, which should generate at least €2 billion in additional revenue, on the basis of 2022 figures. The implementation of the other part of the OECD deal – the reallocation of where profits are taxed – will cost Ireland revenue, though if or when this will happen is not clear.
Overall, Ireland has moved from a position when a lot of factors were in its favour to a more mixed picture. But there are still positives moving into 2023 which should give the economy some resilience. Much will still depend on how the international economy performs, as recession is threatened in many countries, and on geopolitical factors, particularly relating to the war in Ukraine. Some moderation in wholesale energy prices in recent weeks is good news, even if they remain well ahead of the levels we got used to for many years. It looks like another year of significant uncertainty.