Even though it experienced a technical recession in the second half of 2023, the Irish economy remains among Europe’s strongest performers, something that looks set to continue into 2025 despite continuing turbulence on global markets.
Of course, when it comes to measuring Ireland’s economic growth it really depends on what yardstick you use. In gross domestic product (GDP) terms, the picture doesn’t look quite so rosy; for example, the European Commission believes the State’s economy will actually decline by 0.5 per cent in 2024 when this measure is used. It attributes this mainly to a contraction in the multinational sector in the first half of the year.
However, this is not necessarily a cause for concern, as Kate English, an economist with Deloitte, explains: “On the GDP side, we were expecting to see a contraction this year. But as Christine Lagarde has said, we should not get bogged down on just one data point. We need to look at the overall trend. GDP is the only measure in negative territory and it’s volatile. It includes things like intellectual property (IP), aviation leasing and exports. Multinational companies moving IP to Ireland resulted in the massive GDP growth in 2015, for example.”
That was the year economist Paul Krugman coined the term “leprechaun economics” to describe the Irish numbers. The initial figure given was an astonishing 26.3 per cent rise in Irish GDP during the year but that was later revised upwards to an even more incredible 34.4 per cent by the Central Statistics Office (CSO).
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The inclusion of exports is another distorting factor. With a very significant proportion of Ireland’s exports being accounted for by multinational pharmaceutical companies, even slight variations in their performance can have an outsized influence on GDP metrics.
Other measures such as Gross National Income (GNI), GNI star (GNI*), and modified domestic demand (MDD) that strip out these distorting factors and include other indicators of economic performance, including labour market statistics and personal consumption, are therefore seen as more reliable than GDP.
And these indicators are all healthy for the current year and forecast to be strong next year as well, according to English.
“Consumer spending is up 3.3 per cent. Modified domestic demand is up 2.4 per cent. And they are all hovering around 3 per cent for next year as well,” she says. “The Q3 labour market data was really strong, with growth of 98,200 added to employment in 12 months. We have 2.9 million people employed now. When you think of all the external macroeconomic risks and volatility we have experienced since Covid, it’s quite phenomenal that we are adding jobs at the rate we are.”
“Motoring on” is how EY Ireland chief economist Dr Loretta O’Sullivan describes the current state of the Irish economy. “Record high employment and healthy tax receipts indicate that the domestic engine is humming, and EY expects MDD to grow in 2024,” she says. “While the multinational sector put in a turbocharged performance during the pandemic, recent volatility means GDP is likely to stall this year; however, it is forecast to accelerate in 2025.
“The latest data show that the various drivers of economic activity are whirring,” she continues. “Consumers are spending, businesses are hiring, and exports are rising. Inflation has moderated significantly which is boosting households’ purchasing power and the European Central Bank has started to cut interest rates which is helping firms’ investment plans.”
Of course, there are risks to that continued economic good health. “The Department of Finance talks about the four D’s – deglobalisation, digitalisation, demographics and decarbonisation,” says Aebhric McGibney, director of public and international affairs at Dublin Chamber.
“Demographics refers to our ageing population. Decarbonisation is a challenge for all companies – they want to be green but the challenges are the cost and knowing what to do. Companies are struggling with that, but they want to get there. Digitalisation is going to affect every business and a lot will depend on the education of the population.”
He points out that deglobalisation has been in evidence for some time. “Companies have been reshaping supply changes for security and resilience. As a small open economy, Ireland relies on global trade. Our business model is based on being a good place for multinational companies to locate. It is prudent to plan for these risks. We must play a long game and invest in our infrastructure to support long-term sustainable growth.”
O’Sullivan sees sustainability and digitalisation as key factors reshaping economies everywhere. “Focusing on Ireland’s credentials in next-generation growth areas like artificial intelligence, digitalisation and decarbonisation will be important, in tandem with the talent and other attributes that have long made Ireland a location of choice for global investment,” she says.
PwC Ireland managing partner Enda McDonagh agrees. Many business leaders are grappling with general uncertainty in outlook, he says, and with the pace of change impacting their business models in areas such as climate and technology.
“Global geopolitical turbulence, alongside US political change are creating additional risks for Irish business and for inward investment,” he adds. “Businesses are also highlighting external capacity constraints impacting their future growth potential. Additional investment in housing, infrastructure, energy and skills is needed in order to future-proof the economy.
“Having said that, the fundamentals of the Irish economy are strong and the challenges facing companies also provide huge opportunities for innovation and growth. For example, GenAI and climate change are providing new ways of doing business, enhancing experiences for employees and consumers alike.”
And there are some positive external factors coming down the track, according to English. “The most obvious is the decrease in interest rates. Concern about EU economic growth is feeding into a wider narrative of from the ECB where it is making sure it is not inflicting damage on the economy.”
There has been a shift in language and an acknowledgment of the need to stimulate growth, which is echoed in the Draghi Report, she notes. “Interest rate reductions are good news for the economy.”