The last four years have brought four shocks: Brexit, Covid, inflation and Russia’s invasion of Ukraine.
Despite the warnings, all the dire forecasts, the Irish economy has motored through each one, growing by 3.4 per cent in GDP (gross domestic product) terms in 2020 at the height of the pandemic when the rest of the world was languishing in recession; by 15 per cent in 2021; and by 9.4 per cent in 2022.
You might quibble with the use of GDP, which tends to put a gloss on things, but during those years 350,000 new jobs were created, bringing total employment in the Irish economy to an all-time high of 2.6 million and marking out the 2019-2023 era as the strongest period of employment growth in the history of the State.
As employers’ group Ibec noted in a recent report: “The Irish economy has had a spectacular four years with growth outstripping any of our major partners in terms of exports, investment and employment.”
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Large fiscal surpluses on the back of windfall tax receipts also facilitated big giveaway budgets, which simultaneously cut taxes, provided generous cost-of-living supports, increased capital spending and, more recently, established two long-term savings vehicles as buffers against future crises.
In normal times these policy choices would have required difficult, perhaps impossible, financial trade-offs, but the economy, despite the tumult of recent years and a severe domestic housing crisis, has been in something of an economic sweet spot, characterised by jobs-rich growth and bumper tax receipts.
That period is now, unfortunately, over. It came to an end somewhere between the second and third quarters of this year as three overlapping, interlacing forces coalesced – cost-of-living pressures, rising interest rates and slowing demand internationally.
We now stand on the brink of recession. Headline growth has flatlined (modified domestic demand, the Central Statistic Office’s bespoke measure for the Irish economy, was 0 per cent in the third quarter). GDP is already in reverse on the back of a slowdown in multinational exports and, for the year as a whole, is expected to contract for the first time since 2012.
The labour market, the ultimate barometer of domestic conditions, remains strong if a little softer. Unemployment has risen to 4.8 per cent, up from a low of 4.1 per cent earlier this year. And while corporate tax receipts came good in the end, there have been a few bumpy months.
The “broad outlook for the Irish economy appears to have deteriorated as we move through 2023″, the Economic and Social Research Institute (ESRI) says in its latest economic outlook. So what can we expect from 2024?
For the final quarter of 2023, which we don’t have a read on yet, and for the first two quarters of 2024 the economic consensus is for stalling growth and possibly a shallow recession. In most people’s eyes a recession means job losses and business failures, hence the prefacing of the current one or the one envisaged with the word technical. The possibility of it morphing into something more severe remains a risk.
Much will depend on whether there’s a surprise left in the inflation cycle, a possible sting in the tail, that might necessitate interest rates staying higher for longer. At its December meeting European Central Bank (ECB) chief Christine Lagarde warned a host of factors from geopolitical tensions pushing energy prices higher to more extreme weather damaging food harvests all had the potential to challenge the inflationary outlook.
However that was largely dismissed by commentators who fret that the ECB may have gone too far in hiking up interest rates – 10 times in little over a year – and whether the inflation cure (higher interest rates) may now prove worse than the disease (inflation). The full impact of these elevated borrowing costs has yet to play out, and this poses the biggest uncertainty in most economic forecasts.
“While the ECB held its main interest rate at 4.5 per cent in December, the full impact of rising interest rates globally is likely to lag rate announcements by 12 to 18 months,” Ibec’s head of national policy and chief economist Gerard Brady says. “As an example, even if policy rates fall in 2024 another 75,000 households will come off fixed-rate mortgages and face into big increases in their monthly repayments. With inflation already falling to 2.4 per cent in the euro zone in November and business investment indicators showing weakening sentiment, there is now a significant chance that central banks may have overcorrected globally.”
Brady says falling goods exports – they were down 7 per cent on an annual basis in the third quarter – and slowing investment levels are two symptoms of the global slowdown which will persist in 2024.
The US Federal Reserve has already signalled that three rate cuts are on the cards in the United States next year; conversely the ECB, perhaps mindful of how wrong it was initially about inflation, has adopted a more hawkish approach, signalling its intention to await clear and unambiguous signs that inflation is on a sustainable path.
“Because of the likely path for prices and economic activity, and, more importantly, because the ECB raised rates too far and too fast, pressure for a sequence of ECB interest rate cuts beginning early in 2024 is likely to intensify,” says economist Austin Hughes. “The history of the ECB shows they raise rates too far and are quickly forced to backtrack. In 2008 and again in 2011, these were spectacular policy mistakes and led to rate cuts within three and four months respectively as the reality of an engulfing crisis dawned on Frankfurt.”
Either way we’re likely to experience stalled or anaemic growth for much of 2024.
For households financial pressures are likely to remain. The final bill from the cost-of-living crisis last year alone has been estimated at €10,000 per average household, with higher energy bills, elevated food prices and increased mortgage repayments the main components. Even with the significant fall-off in energy prices seen in recent months, cost pressures remain intense.
In many areas outside energy, inflation is merely softening; we’re not getting an actual reduction in prices.
In its winter commentary the ESRI said the effects of inflation on real incomes, increased interest costs and a drop-off in accumulated household savings from the pandemic period had all contributed to a moderation of private consumption. It still expects consumer spending to grow by 2.5 per cent in 2024 despite the wider economic slowdown. But household spending had surged 9.4 per cent in 2022.
The “soft landing” narrative – which is now the consensus opinion underpinning most economic projections – suggests that if inflation remains on a downward trajectory and the ECB begins reducing interest rates, we could see a pick-up in demand in the latter part of 2024, and a resumption of growth in the second half of 2024 and 2025.
The OECD (Organisation for Economic Co-operation and Development) is forecasting a mild slowdown for the global economy in 2024 and slightly improved growth in 2025. But in its latest outlook it highlights a range of risks to that scenario. “Geopolitical tensions remain a key source of uncertainty and have risen further as a result of the evolving conflict following Hamas’ terrorist attacks on Israel,” it says.
“Amid heightened geopolitical tensions and a longer-term decline in the trade intensity of growth, the anticipated cyclical pick-up in trade growth could fail to materialise,” it says.
Big economic powers, including the US, are turning inward, a trend sped up by the pandemic. Ireland as a small, export-led economy remains exposed to such a check on globalisation.
2024 also promises to be perhaps the most politically turbulent year in decades with more than 40 elections scheduled, starting with Taiwan in January and culminating with the US elections in November. The latter could see the return of Donald Trump to the White House, ushering in greater levels of US isolation, global trade tensions and, most worryingly, a sea change in the pattern of the Ukraine war.
Eddie Casey, chief economist with the Irish Fiscal Advisory Council (Ifac), strikes a more optimistic note. “Ireland heads into 2024 in a strong position. Savings are high. Household and business debt is low. The Government’s debt ratio is falling. Net exports look good. The jobs market has maybe once in the past 70 years looked this strong. And price pressures are projected to continue easing next year,” he says.
“There are many fronts we can be more ambitious on. We lag peers on housing, healthcare, and transport infrastructure. It’s still unclear how we intend to achieve our climate transition. Pension and healthcare costs are rising. Tackling these ambitions and challenges needs good planning. The Government might spend more but needs to be mindful of how it adds to price pressures.
“The private sector has a role too,” Casey says, noting the Society of Chartered Surveyors Ireland’s keenness on higher density estates and more off-site construction. “Putting the national tax and spending rule on a stronger footing would help everyone plan.”
The Irish Fiscal Advisory Council launched a broadside against Government before Christmas over its spending plans, accusing it of “bad budgeting”, repeating the mistakes of the past and using “fiscal gimmickry” to flatter its budgetary numbers. Minister for Finance Michael McGrath defended the Government’s position, insisting Budget 2024 had struck the right balance. He also noted the Government achieved a surplus of over €8 billion in 2022 and was on course for large budget surpluses in 2023 and 2024 despite having come through successive shocks, including the pandemic and the spiral of inflation caused by the Russian invasion of Ukraine.
Casey says: “We should, of course, spend money. But we should get the balance right. Not everything now. Not pushing tax cuts and spending increases in all areas too much too soon. We tried that before. It didn’t work. Let’s hope 2024 brings better plans.”
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