A sudden slowdown in demand for Irish exports linked to changes in United States trade policy or a global recession would have a “severe impact” on the economy here, the Economic and Social Research Institute (ESRI) has warned.
In its latest medium-term economic outlook report, the think tank highlighted the economy’s “remarkable performance” over the past decade while warning of three potential shock scenarios that could derail it in the years ahead.
In a “global slowdown scenario” involving a 5 per cent reduction in export demand, it calculated that economic activity would be 3.2 per cent lower by 2030 compared to a baseline scenario involving no shock.
Household disposable income and consumption would also take a hit with the ESRI projecting these to be 6.7 per cent and 6.2 per cent lower respectively than they might have been. Unemployment would be 3.5 percentage points higher.
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“The openness of the Irish economy means that a slowdown in world trade will have significant, direct effects on employment, incomes and spending in Ireland,” it said.
The ESRI report examined how changes in the global economic environment and domestic policies might affect Ireland’s economic trajectory.
It assumed a baseline scenario – in the absence of any major shocks – where the economy grows at a steady rate of 2 per cent to 2.5 per cent a year to 2035.
[ Irish economy contracts by 0.3% as multinational export surge unwindsOpens in new window ]
The last time the ESRI published a medium-term economic outlook report was in 2016. It had planned to publish a similar analysis in 2020, but the pandemic disrupted its plans.
In a second shock scenario involving a sudden contraction in Ireland’s competitiveness relative to its trading partners, the impact here is also “significant” with national income declining by 3.1 per cent compared to the baseline by 2030.
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The competitiveness shock would have an even greater effect on private consumption, which would be 8.6 per cent lower than the baseline, as domestic consumers struggle with the increased cost of goods and services.
In a third “multinationals” scenario, the ESRI explored the impact of future foreign direct investment (FDI) flows declining “and a gradual scaling back of activity levels among multinationals” rather than a full and immediate exodus.
In this scenario, the ESRI assumes employment in the pharma and IT sectors here declines by 10 per cent.
The effect on the economy as a whole is less than the other two scenarios with national income being 1.5 per cent lower by 2030.
However, effects on the labour market are larger with a 2.5 per cent reduction in total employment and a 1.5 percentage points increase in the unemployment rate.
“If you build your success on being a very open economy then anything that happens in the external environment is going to have a pretty rapid impact on growth here,” the ESRI’s director Martina Lawless said.
She said “the very strong growth” of the last 10 years had been driven – in the main – by multinational exports.
“What that means – on the risk side – is that anything that slows down exports – whether it’s a global slowdown, whether it’s a trade war, whether it’s Trump tariffs ... we’re very exposed to those external shocks,” she said.
Ms Lawless said policymakers must ensure Ireland maintained its competitive edge and that the State invested in the current infrastructure gap.
Despite a raft of warnings about Ireland’s potential exposure to US tariffs, the economy here is expected to grow by up to 11 per cent this year in traditional GDP (gross domestic product) terms.
This is because the two sectors that dominate exports – pharma and tech – remain outside the scope of US tariffs and continue to perform strongly.
Commenting on the report, the ESRI’s Aykut Mert Yakut said: “The scenarios with negative external shocks portray a pessimistic outlook regarding potential implications stemming from the vulnerabilities of the Irish economy due to its reliance on multinational corporations.
“On the other hand, the results also indicate that carefully tailored strategies aimed at rebalancing the composition of economic activity between foreign- and Irish-owned firms through productivity improvements would yield substantial benefits.”
