We have spent a fair bit of the last couple of months worrying about the risks to the Irish economy from the election of Donald Trump as the next US president. Trump and the people around him believe that when the US has a trade deficit with another country, then that country is stealing their wealth. Given that Ireland’s surplus on trade in goods with the US ran to $50 billion last year, the State could be in the firing line, with potential implications for our economic model.
But we just don’t know how this will play out. Perhaps even Trump himself hasn’t worked it out. And in the meantime the Irish economy motors ahead. In the spirit of the season, let’s consider the optimistic scenario for the economy.
There is no doubt that, right now, a lot is going right, which goes some way to explain the general election result. Living standards are on the rise again on average as earnings outpace inflation and Ireland is at, or close to, full employment. There are so many measures of the economic growth these days that your head would spin, but the Economic and Social Research Institute (ESRI) has predicted that the domestic economy will expand by a healthy 4.2 per cent next year in real terms, while Davy Stockbrokers says it believes the economy will expand by close to 4.5 per cent. Most other EU countries would take your hand off for half that.
The public finances, meanwhile, remain in rude health, with strong surpluses expected this year and next, despite very significant growth in Government spending. There is clearly leeway here to absorb some level of shock from Trump’s policies, even if the next government would have to face up to prioritising its choices and dropping parts of its plans were this to happen.
This is the optimistic scenario for the Irish economy in 2025
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In our rosy scenario, the next government will continue to have the resources to increase investment spending and public services and thus there will be some improvements in areas like housing, health and childcare. Davy stockbrokers predicts that house completions will rise from 34,000 this year to 42,000 next year and 50,000 in 2026. This investment will take up some of the running in supporting economic growth, it says, even as the jobs boost from multinationals eases a bit.
Of course, it is multinationals which are creating many of the resources to pay for the extra State spending. So underlying the more optimistic forecasts is the expectation that while we are facing a more bumpy road ahead, multinational investment will continue and tax payments from this sector will remain strong. The risks here are the big caveats to the rosy scenario — the “downside risks” that forecasts worry about. It is really difficult to judge what Trump will do or what it would mean, though the risks of tariffs and trade wars for Ireland are real.
If things remain on the optimistic track, total employment will reach a record 2.8 million-plus next year, up by close to 500,000 since before the pandemic and the unemployment rate will remain just over 4 per cent. The rate of inflation will be very moderate — the ESRI and Davy are both forecasting an average increase of just 1 per cent in the consumer price index in 2025 — meaning that wage increases will flow through to increases in real living standards. With growth in the rest of the EU weak, a sustained fall in interest rates looks likely to continue. Many households will experience a bit of a financial feel-good factor for the first time in a few years.
We are not back to the credit-fuelled bubble of 2007, but in the optimistic outlook, the economy will remain at full capacity. Businesses will continue to struggle to get — and retain — staff. There will be ongoing demand for more homes. Housing demand will be strong and house prices will remain on the rise. Indeed, in an echo of the pre-bust period, the recent ESRI report cautioned that house prices now look to be up to 10 per cent overvalued and that, in the event of a downturn in the jobs market, some of those who bought in recent years could be exposed. Meanwhile, those not yet on what used to be called the housing ladder will find they continue to be priced out.
How can the next government approach this? For now, it has to do two things. Plan to plough on with big investments vital to Ireland’s economic and social future on the basis that the cash continues to roll in. But deliver them much more effectively than the outgoing Coalition. And have a Plan B in case something goes wrong. Let’s call it the €10 billion plan — as this scale of cash could disappear over a couple of years in a worst-case scenario.
Part of the strategy has to remain putting cash away in two special funds for as long as the corporate tax revenue continues to roll in. A plus side in the record of the outgoing Government was establishing these funds. Having this cash available to spend if pressure did come on the public finances would be vital. It could help to break the boom-to-bust cycle which has bedevilled Irish economic history and has meant that government spending, particularly on investment, is slashed when a slowdown or recession hints. That said, if there are longer-term changes to the structure of investment and tax, it will in time raise more fundamental questions for the State.
So the next government needs to treat the cash coming into the exchequer now as a finite resource, a once-off opportunity to invest in housing, energy, water and social infrastructure and to create buffers for the public finances to absorb shocks. It also needs to scenario-plan for possible tariffs and trade wars and look urgently at how to protect our economic model. But here we come back around the circle. Underpinning future investment requires better housing, green energy and clean water, as well as significant investments in training and education. The huge resources being thrown off by the big companies here today can help pay for what we need to do to attract future generations of investment of all sorts. As we don’t know how long the bounty will last, delivery on this agenda is now critical.