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Are we waiting for an Irish recession which may never arrive?

Smart Money: Living standards are dropping for the first time since after the financial crash, but it’s just possible that the Irish economy will hang on in

The economy continues to hold up, despite pressures from the cost-of-living crisis. New Central Statistics Office (CSO) figures give insights into the impact on households of soaring inflation and how they are responding.

Huge uncertainty remains and there is no doubt that we are seeing a sharp slowdown in growth. But with the multinational sector still contributing to growth and signs from the euro zone not as bad as anticipated, might 2023 again see the Irish economy hanging in?

1. Standard of living edging down

The cost-of-living crisis is, of course, having a big impact. A key insight from the latest CSO figures is the hit on the disposable income of households – a measure of the standard of living. The real (inflation-adjusted) level of disposable income fell in the third quarter by around 0.4 per cent compared to the previous three months – and has declined in three of the last four quarters. It peaked in the third quarter of 2021, when it reached the highest level in the 24-year history of collecting the data.

The longer term trend here was a big fall in living standards after the 2008 financial crash followed by a few years of not much change and then a strong recovery.


The drop after the crash was around 11 per cent, based on the latest CSO figures looking at household disposable income. There followed a period when living standards bumped along before a rise started in 2015. They did not get back to their pre-financial crash peak until early 2017. By the third quarter of last year, living standards as measured by disposable income had risen by more than 30 per cent from their lowest levels after the financial crash. They have now fallen by 1.4 per cent from this peak. The big question is what happens next.

Notably, the latest fall in living standards is due to higher inflation. People’s incomes have, on average, continued to rise – unlike in the wake of the financial crash, job numbers remain strong, unemployment is at a record low and wages, on average, are rising. Household earnings were up in the third quarter of 2022 as more people were in work – but soaring inflation outpaced this growth, leaving real incomes lower. That, if you like, is the bad news.

2. But savings are up and spending is solid

The better news is that despite this, consumer spending has been quite resilient and also households – probably largely better-off ones – are continuing to accumulate significant savings. Savings were running at 19.5 per cent of income in the third quarter of last year, as shown by the latest CSO figures. According to a note from Davy economist Conall Mac Coille: “This is an enormous buffer for many households to potentially sustain spending through the squeeze in real incomes from energy bills and elevated CPI inflation.”

Savings rates here remain among the highest internationally and have transformed from the years before the financial crash – Irish consumers, chastened by the experience of the crash, are much more cautious now, a trend also evident in total borrowing figures, with net savings also boosted by debt being paid down, as well as more cash in the bank. Savings rates now are close to double the 10 per cent average in the years before the pandemic, even if they have fallen back from their pandemic lockdown highs when many normal spending routes – holidays, nights-out and so on – were closed off.

Consumer spending also remains surprisingly resilient, despite the squeeze on incomes. Here we need to be careful to understand the impact of inflation. Households are spending more cash because prices are going up, but their money isn’t going as far as it did before.

Nonetheless, the latest figures show a slight increase in the volume of consumer goods and services purchased during the third quarter. As this coincides with lower disposable income, it suggest households are dipping into savings a bit to keep up consumption.

More recent CSO figures suggest that the squeeze on spending continues to tighten. Retail sales figures for the month, which look at spending on goods, show the total cash spend by consumers was up 3.6 per cent year on year in November, but the actual volume of goods this bought was down 4.2 per cent. The gap is explained by inflation and particularly the need by households to spend around 20 per cent more on energy bills. Excluding volatile car sales, the volume of sales was nonetheless up 3.5 per cent in November on the previous month. So far, household spending, a vital piece of the overall economic picture, while under pressure, is hanging in. Christmas trends will be interesting to watch.

3. What about the rest of the economy?

The business sector is the other key part of the economy to watch. While forward-looking purchasing managers’ indices show nervousness and indicate a slowdown, employment remains strong. The latest official figures show a drop to 4.3 per cent in the unemployment rate and jobs website Indeed says the level of postings on its site remain 60 per cent up on pre-pandemic levels. Grant Thornton’s latest survey of Irish business also shows that attracting and retaining labour remains a key issue for Irish companies. So while we know of lay-offs and slowing recruitment in the tech sector – and the latest BNP Paribas index suggests that construction firms have also slowed hiring – there is still strong demand for people in many sectors and this is supporting wages as well as job numbers. Employment tends to be a lagging indicator when a slowdown hits, so these figures bear close watching going into 2023. But so far, given the hit to the economy and to businesses from higher prices, jobs have held up better than would have been expected. Figures out on Thursday showed that employment in Ireland was 5.6 per cent up in November on a year earlier, after rising again during the month, following a few months when it appeared to be topping out.

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Recent figures also show that the export sector remains strong and we know that, driven by multinationals, this continues to lead to strong growth in GDP and even in figures such as Gross National Income which factor out some of the distortions from the multinational sector. The latest data shows that gross value added by industry in the State was 21 per cent – (or €17.8bn) higher in the third quarter than in the same period in 2021– much of it driven by manufacturing, within which pharma and medtech remains dominant. The ICT sector grew, but at a slower pace – and will likely slow or decline this year. While much of the extra value added flowed back in profit repatriations and royalty payments, multinationals continue to support Ireland’s overall economic figures.

Domestic businesses continued their bounceback from Covid-19 lockdowns. However, some closures in areas such as the restaurant sector show that the combined impact of Covid and the cost-of-living crisis is taking its toll.

4. The bottom line

The resilience of the economy here – and signs that the euro zone may not hit the deep recession which had been anticipated – give some cause for optimism that Irish growth can stay in positive territory this year. This will be supported by multinationals, while the cost-of-living squeeze will continue to put pressure on households and their spending. The consumer sector may thus face its own mini-recession and this will continue to put some domestic firms in trouble, with predictions of a jump in liquidations. But with strong savings in better-off households, overall spending levels will not see the kind of fall seen after the financial crash. The uncertain course of the war in Ukraine – and the implications of this for the world economy – mean the economic outlook for the Republic remains impossible to predict with any confidence. Sentiment has been shaken by the cost-of-living crisis and growth has slowed rapidly after the bounceback from Covid shutdowns in the domestic economy. But what we can say is that, so far, the impact of the cost-of-living crisis has been a good deal less dramatic than would have been expected.