Ireland’s growth has run out of steam: the post-Covid economic bounce is well and truly over

For years Irish economic growth data has been inflated by the activities of multinationals, with growth rates often multiples of the international average. Now we are seeing the other side of the coin. A fall-off in multinational exports and investment means gross domestic product will fall this year for the first time since 2012, according to the latest forecast from the Economic and Social Research Institute (ESRI), which predicts a decline of 1.6 per cent.

We know, of course, that GDP is a very poor indicator of the Irish economy. So, it is important to look at the details of what the ESRI is saying to get a sense of what is really going on. The key message is that Ireland is heading for slower growth, though not a recession, even if technically that it what the GDP figures will show. What is clear is that the post-Covid economic bounce which led to extraordinary growth in 2022 has run out of steam.

“There is definitely a slowdown generally”, according to ESRI research professor Kieran McQuinn, with the think tank reducing its 2023 forecast for the growth in modified domestic demand, the most reliable measure of the domestic economy, to 1.8 per cent, from 3.5 per cent in its previous forecasts. Unemployment will remain low at about 4 per cent and, while the ESRI does expect growth to pick up a bit again next year, it does not anticipate a return to rapid expansion, with more “moderate” growth rates becoming the norm.

As well as reducing its forecasts for the consumer side of the economy, the institute now expects exports to grow by just 1 per cent this year and 3.4 per cent next year, a major fall-off from the 10-15 per cent growth rates seen in recent years. Goods exports, particularly in the pharma sector, are weak, while computer chip sales to China are also down, presumably reflecting restrictions imposed by the US government. However services exports are stronger, including those in the ICT sector where there have been a string of job losses.

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Irish export figures are distorted as they include so-called contract manufacturing, where multinational companies with international bases here arrange for goods to be produced in other countries. To the extent that the fall-off in exports relates to this – and it does appear to be an important factor – it will not affect jobs and investment in Ireland, though it could affect taxes. Nonetheless, the international slowdown is having a wider impact in what the ESRI says is a “broad-based decline” in goods exports.

With the main engines of the economy – consumer spending, exports and investment – all stuttering at the same time, the economy is coming off the boil. And this provides a tricky backdrop for the Government as it presents its budget. According to McQuinn, the challenge is to avoid adding to inflation by boosting consumer demand, but at the same time maintain State investment in areas like housing and the climate transition. It is, he says, a difficult balance to strike.

In housing, the ESRI says that higher interest rates are likely to hit private sector activity, meaning the State will have to take an increasing role if targets are to be met. It predicts 29,000 housing completions this year and 30,000 next year, but points out that more will be needed as official estimates of housing need are set to be increased.

Building housing and energy and water infrastructure can, in time, help to relieve inflationary pressures by adding vital capacity to the economy. But the conundrum is that pumping money in to do this in the short term can risk adding to inflation. The slowdown now under way may help to the extent that it could leave more leeway and free resources in areas like building. Conor O’Toole, associate research professor and a joint author of the latest quarterly report, says a key challenge for the State is to find ways to build vital infrastructure even though the economy is already operating at full capacity.

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The State has the resources to build the economy’s capacity, even if the latest exchequer returns will sow some further uncertainty about the trend in corporation taxes, which were down in September for the second month in a row. The September figures last year had been inflated by a once-off factor and the key corporate tax data will be November, when most companies make their final tax payment for the year. Nonetheless, the latest figures came as a surprise to tax accountants and were underlined as a risk by budget Ministers Michael McGrath and Paschal Donohoe, fighting to keep spending plans in check for 2024.

The public finances have operated in recent years on the basis of consistent strong overruns in tax revenue, led by corporation tax, allowing this Government and its predecessor to increase spending, make some tax reductions, move the exchequer into surplus and cut borrowing. Now the economy and revenue growth look to be slowing, while a new report from the Fiscal Advisory Council points to costs running into billions for the exchequer from the climate transition.

Ireland’s tax revenue base has increased hugely over recent years, offering significant opportunities, but before very long being in government looks set to involve much more difficult decisions and trade-offs on the public finances.