Despite experiencing a technical recession last year, the first in over a decade, the Irish economy continues to be one of the best-performing in Europe.
Employment remains at a historic high of 2.7 million, Government coffers are awash with tax receipts (and not just from the corporate sector) while inflation seems to have returned to more normal levels.
According to most forecasts, the economy here is expected to grow at a moderate but steady rate in 2024 and 2025 (2-3 per cent) on the back of quicker-than-expected disinflation, further interest rate cuts and a pickup in global trade.
More significantly, real wages are forecast to grow as nominal income growth outstrips inflation, providing a much-needed boost to cash-strapped households after two years of squeezed living standards. The increase in real wages will underpin an increase in consumer spending, the main driver of domestic activity.
The headline measures, while impressive, have to be seen in the context of an aggravated housing crisis, a dysfunctional health service and an underfunded education system, symptoms of an economy, and a private sector, that has outgrown its original infrastructural moorings.
Alleviating these bottlenecks remains a key challenge for Government.
“The Irish economy is doing well on many fronts but given serious issues in areas such as housing, health, transport and climate change, I think it would be wrong to say it is in rude health,” economist Austin Hughes says.
“The good news is we have (some) time and (lots of) financial capacity to put the economy on a strong and sustainable path. The bad news is a lot of the economic ‘doctors’ aren’t prescribing a radical enough or rapid enough programme of investment in Ireland’s longer-term economic health,” he says.
For Hughes, the planned level of public investment laid out in the recently updated National Planning Framework, or Project Ireland 2040, won’t cut the mustard.
The plan promises major transport investments, including Dart+ and a revamped Cork area commuter rail system, alongside further investment in social and affordable housing programmes and more hospital beds, reflecting stronger-than-expected population growth and increased construction costs.
For Hughes, it falls short of the “step-change” required.
Capital spending as a share of national income has been 1 per cent lower than what the Government had envisaged to this point primarily because of Covid and difficulties relating to the deployment capital.
Hughes is sceptical about the perennial warnings from the Irish Fiscal Advisory Council (Ifac), the Central Bank of Ireland and others that investing too much poses an overheating risk for the economy.
“The Irish economy has consistently demonstrated a capacity to grow beyond the expectations of economists. While it is not unlimited by any means, it has exceptional elasticity and flexibility that mean mechanical definitions of capacity may not be any way helpful and could, instead, hamper policy-setting,” he says.
“Remember, there were loud and serious warnings of overheating back before Covid. Yet over the past five years employment has increased by just under 400,000 matched by a similar increase in the labour force,” Hughes says, while noting Irish inflation is currently below the euro area average.
“Yes, Ireland is a relatively high-cost economy but that is not necessarily a problem. What we need to focus on is how to ensure costs don’t move seriously out of line with productivity. Simplistic carping about overheating isn’t helpful in this context,” Hughes says.
“How this can be managed is far from clear, but it must be done if we are not to move beyond the Irish economy’s current ‘sweet spot’ in terms of demographics and favourable finances fairly quickly,” he says.
Housing and other infrastructural deficits will form the backdrop to the upcoming budget and an expected general election in the autumn. The latter is likely to initiate a period of auction politics as parties try to woo voters with bigger and bigger spending promises.
In his maiden speech as Fine Gael leader, Taoiseach Simon Harris promised 250,000 new homes over the next five years, a level of homebuilding that hasn’t been seen since the Celtic Tiger era.
“The Irish economy is in a very strong position, with record high employment,” Ifac chief economist Niall Conroy says.
“This is good news, but it means this is not a time for the ‘everything now’ approach of tax cuts, increases in current spending and ramping up capital spending all at once.
“Choices need to be made between different demands. Otherwise, budgetary policy would add to price pressures and make overheating the economy more likely to occur,” Conroy says.
Ifac has for several years been warning the Government about not trying to do too much, too quickly, particularly with a sequence of big budgetary surpluses projected and now in the context of an upcoming election.
He pushes back on Hughes’s point about the overheating risk, suggesting the decline in energy prices is masking significant domestic cost pressures with prices in the hotel, restaurant sector still rising at an annual rate of 4 per cent.
He also cites a recent Central Bank report, which calculated that by breaking its own 5 per cent spending rule, the Government has added 1 per cent to inflation over the last two years.
The spending rule, adopted in 2022 but broken every year since, seeks to keep the annual increase in Government spending inside a 5 per cent ceiling, seen as sustainable in the long term.
Cumulatively, the Government’s breaches of the rule have added an additional €8.5 billion to spending to date. If the Government wants to address infrastructural deficits by increasing its capital spend it can do so but only alongside offsetting measures (tax cuts or limiting current spending elsewhere), Conroy says.
Ifac also wants the Government to save now (while the economy is performing) to pay for mounting age-related and climate transition costs down the line. The planned creation of the Future Ireland Fund and the Infrastructure, Climate and Nature Fund with the use of excess corporation tax receipts is the Government’s response.
Periods of reckless spending in the past have typically been followed by episodes of enforced cost-cutting and austerity. And the first thing to get cut in a period of retrenchment, history tells us, is the capital budget. The funds are an attempt to break this cycle while locking future governments into more prudent budgeting.
Either way, newly installed Minister for Finance Jack Chambers will have his work cut out to keep a lid on spending with backbenchers pushing for a voter-friendly budget.
Like every forecast related to a small open economy like Ireland’s, there are big downside risks emanating from the increasingly uncertain international backdrop.
Perhaps the biggest is a further ratcheting up of geopolitical tensions with Russia’s war in Ukraine and Israel’s invasion of Gaza the obvious flashpoints. Either could trigger further disruption to global trade and/or another commodity price shock.
The possibility of Donald Trump returning to the White House in the US also comes with significant risk. Apart from cementing the recent pivot towards deglobalisation and protectionism, Trump’s tariff plan – he has floated the idea of a 10 per cent universal import tariff with even bigger penalties on Chinese imports – could trigger a global recession.
According to an analysis from Moody’s Analytics, Trump’s economic plan, which would also include slashing taxes for the rich and mass deportations of immigrant workers, would trigger a recession by mid-2025 and possibility another inflationary spike.
“The biggest risk on the horizon is that the global context for Ireland’s economic model is changed,” says Ger Brady of employers’ group Ibec.
“The rise of state-driven competition for investment, increasing geopolitical tensions, and decreasing trade openness are not beneficial for small countries like Ireland,” he continues.
“We will never be able to compete with larger countries when it comes to subsidies and have benefited enormously from global trade integration. Now more than ever, we need to be laser-focused on competing based on our own strengths,” Brady adds.
Ireland’s economic outlook always seems to come with caveats. Being so reliant on foreign market and foreign investment has its occupational hazards. That said, the economy has successfully navigated a sequence of international crises – Brexit, Covid-19, the war in Ukraine and inflation – and has come out stronger on each occasion.
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