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Ireland’s winning economic model comes with a risk that’s never really been tested

Our topsy-turvy economy sees back-to-back quarters of negative growth recorded amid full employment

The Government may set up a National Reserve Fund to invest corporation tax windfall gains. Illustration: Dean Ruxton

The Irish economy is a confusing place at the best of times. In the last 10 days, we’ve had three big data points, two indicating how far we’ve travelled employment-wise since the grim aftermath of the 2008 financial crisis and a third indicating that the economy, which has been the fastest-growing in Europe for nearly a decade, fell into a technical recession in the first quarter of 2023.

The word “technical” is used advisedly. A recession, by definition, is a sustained and widespread downturn in economic activity. For most people, that means jobs lossess, dole queues and business insolvencies.

While households are under considerable financial strain from higher prices and mortgage costs, we’re not experiencing a recession in any real sense.

Nonetheless, the latest quarterly national accounts from the Central Statistics Office (CSO) indicated the economy shrank in gross domestic product (GDP) terms by 4.6 per cent in the first three months of the year.


The agency also revised down its estimate of GDP for the final quarter of last year to -0.1 per cent, down from an original estimate of 0.3 per cent.

The revision means the economy, as measured by GDP, has experienced two consecutive quarters of negative growth, meeting the definition of a technical recession.

A few months ago we were talking about how double-digit growth in the Irish economy last year had helped the euro zone economy avoid a recession, a case of the tail wagging the dog.

Now we’re mulling back-to-back quarterly contractions.

The downturn was driven by a decline in output in the multinational, big pharma-dominated “industry” sector, which resulted in a falloff in net exports.

The flows and trends governing multinationals here are largely independent of the domestic economy. Most of the time, they flatter actual economic activity. This is a rare exception.

Minister for Finance Michael McGrath cautioned that multinational production “can be extremely volatile on a quarterly basis with large swings a pattern of recent years” .

“Indeed, given the outsize role the multinational sector plays in our economy, GDP is clearly not a useful measure of the living standards of domestic residents,” he said.

That’s an understatement. In an era where intangible assets worth tens of billions of euro can be redomiciled at the stroke of pen, it’s become an increasingly ropey barometer.

As measured by modified domestic demand (MDD), a better indicator of domestic activity, the economy expanded by 2.7 per cent on the back of greater personal spending on goods and services. Most domestic-focused sectors of the economy also recorded an increase in activity.

Talk of a recession, even a technical one, is also at odds with the fact that we’re at full employment. Separate CSO figures last week indicated that unemployment dipped to a new record low of 3.8 per cent last month. Any rate below 4 per cent is tantamount to full employment.

The unemployment rate was last at 3.9 per cent between October 2000 and April 2001, during the Celtic Tiger era, the era before the housing boom and bust.

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A rate of 3.8 per cent has not been recorded before, at least not since the current data series began in 1998.

The new record low in unemployment came on the back of an even more important employment milestone.

The number of people at work in the Irish economy has risen to an all-time high of 2.6 million, growing by more than 100,000 in the space of a year against a backdrop of supply chain disruption, inflation, job cuts across the tech sector and war.

These are big numbers for Ireland. As recently as 1961, the Republic’s entire population was just 2.8 million and mass emigration the dominant narrative. Former Central Bank governor Patrick Honohan always maintained that employment was the best lens through which to view the Irish economy.

Whatever misgivings you might have about economic growth – the seemingly endless pursuit of it, the climate crisis it appears to be driving – or its much-maligned yardstick, GDP, it has transformed the labour market here, brought us to full employment and stemmed the tide of forced emigration.

Ireland’s economic model, which is centred around attracting foreign direct investment (FDI) principally from the US, has been on a winning streak. It has seen us motor through successive crises – Brexit, Covid, inflation, war – and outperforming our economic peers.

Even the clampdown on multinational tax avoidance commandeered by the Organisation for Economic Co-operation and Development appears to be culminating in a favourable outcome for Ireland with corporate tax receipts here expected to increase again – from last year’s record €22.6 billion haul – under the new global minimum rate.

This success comes with a concentration risk, one that’s never really been tested. By any metric – output, employment, tax – the Irish economy has become increasingly dependent on multinationals.

The concentration of corporation tax with 10 firms supplying 60 per cent of receipts is well-known, but new research from the Irish Fiscal Advisory Council indicates that just three firms accounted for one-third of all receipts between 2017 and 2021.

A big bang in the global pharma or IT sector will be amplified here. And there’s no guarantee we will attract the next wave of AI-related technology.

In many ways, Ireland is the perfect exemplar of globalisation: open, export-led and dominated by behemoth companies whose balance sheets are bigger than the balance sheets of many of the economies they operate in.