Judging the state of the Irish economy is complicated by the well-known distortions to many of the key statistics. The activities of multinationals here has created a range of issues, particularly in relation to Gross Domestic Product (GDP), the most commonly used international measure.
This means that figures showing a decline in GDP in Ireland in recent months have not attracted too much attention. The latest data, published last Friday showed a 1.8 per quarterly cent fall in GDP, which was down 4.7 per cent on one year earlier. Just as the consistent rises in GDP since 2015 have generally overstated the growth rate, the recent declines do not reflect what is going on in the wider economy.
Employment, perhaps the best indicator, remains at record levels and has grown over the past year. Many businesses continue to complain about labour shortages . The public finances remain in strong surplus. Any real measure of the Irish economy would not point to a decline of nearly 5 per cent over the past year, as the GDP figures would suggest.
That said, there are reasons for caution. The drop in GDP reflects a fall-off in exports from a number of big multinational sectors, including pharma and information technology. Some of this may relate to a decline in so-called contract manufacturing – the production of goods outside Ireland still counted in Irish GDP figures as it is organised from international headquarters based here. But some also relates to goods produced in Ireland.. And all this has implications for activity and taxes in Ireland.
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Meanwhile, Irish consumers have been squeezed by the cost-of-living crisis and rising interest rates. This is affecting confidence and is slowing spending growth.
The Irish economy retains considerable strengths, notably in the remarkable performance of the jobs market. The Government could afford a generous budget, though recent concerning signals on corporation tax could reduce room for manoeuvre. And shortages in areas like housing show an economy at full capacity, which in itself acts to slow future growth.
A return to slower economic growth rates would have big implications . This will need to be managed, with the goal of avoiding the kind of boom to bust cycle seen in the past. Part of this involves ongoing cautious management of the public finances and the recognition that having funds set aside is vital in uncertain times. Budget management in recent years has - wisely - moved the public finances into surplus and set cash aside.
The other part of the challenge is becoming better at delivering the vital investments in housing, climate and infrastructure needed to underpin the economy’s future. Here, a slowing of growth will inevitably make decisions more difficult.