Solid growth despite a slowdown
Following two years of double-digit growth, the Irish economy is expected to slow in 2023 due to a myriad of factors that primarily stem from price rises experienced in 2022 which are expected to continue in 2023, albeit to a lesser degree. In spite of the economic slowdown, Ireland will still be one of the few European economies seeing growth rates above 1% in 2023, partly due to the activity of multinationals based in Ireland operating in less cyclical sectors, such as pharmaceuticals and IT.
It is anticipated that inflation will have peaked in 2022, but due to price stickiness – core inflation was around 6.9 % in May 2023 – a tight labour market, and higher wage expectations, it will still be above the ECB’s 2% target. Energy prices will remain high in 2023 from a historic perspective, with oil and natural gas being the largest energy sources in Ireland (78% of the energy composition in 2021). Inflation will cause domestic consumption to slow in 2023 as households’ disposable income will be reduced, caused by a consecutive year of falling real income. Private consumption started coming down in Q1 2023. Adjusted for inflation, wages fell by 3.0% in Q1 2023. However, Irish households still have a high savings rate (18% in Q1 2023 against 11% in Q1 2019).
Despite continuous investments from multinationals and a healthy pipeline in the first half of 2023, capital investment will be affected by high operational costs, elevated costs for inputs and labour, and high interest rates that on top of global uncertainty will dim investments by companies. Trade will also take a hit as Ireland’s main trading partners, the UK and EU, will experience a recession, or at least economic stagnation, in 2023. Exports are not the only sector to be affected; imports will ebb due to households’ depressed purchasing power. High energy prices will continue to cause an inflated value of imports. Corporate insolvencies rose by 21% in Q1 2023 but still remain low compared to previous years (down 25% from Q1 2019). As companies continue to battle high costs at the same time as many government support initiatives were phased out, corporate insolvencies are expected to rise further in 2023.
Strong but vulnerable fiscal situation
The public accounts registered a surplus in 2022 with tax revenues growing substantially, partially due to a rise in corporation tax collected from multinationals on back of both solid profits in 2022 and some internal one-off activities. The public accounts are expected to show another surplus in 2023 with tax revenues expected to rise more than expenditures. The 2023 Budget included many cost-of-living measures (worth EUR 11 billion, 2% of GDP) such as energy rebates, an extended fuel allowance, reduced public transport fares, and increased social payments. It also included a rise in the bottom income tax band, resulting in a lower tax burden (EUR 1.1 billion). However, the government also announced that the lowered VAT rate on hospitality would end in February 2023 along with the end of energy support for companies.
The Minister of Finance stated that the International Tax Agreement, which Ireland signed in October 2021, will be implemented in December 2023 before the 1 January 2024 deadline. The Tax Agreement will increase the corporate tax rate from 12.5% to 15% for companies with a turnover of at least EUR 750 million. There is some uncertainty around how this will affect the activity of multinationals in Ireland, which currently is a major employer and tax contributor: multinationals’ share of corporation tax was 25% in 2021 and was as high as 50% in 2022 (due to one-off high taxes). The vulnerability of public finances is all the greater given that more than half of corporate tax revenues are attributable to just ten multinationals, and this reliance will be all the more glaring as the Tax Agreement comes into effect.
The current account balance is extraordinarily volatile as it is affected by multinationals and their investments. The balance of goods is structurally positive (40% of GDP in 2022), but the balance of services fluctuates widely – a deficit of between 20-30% of GDP in 2019-20 to roughly being on balance in 2021 and 2022. It essentially depends on imports of R&D services, such as transfers of intellectual property assets from foreign subsidiaries of multinationals to their Irish subsidiaries. At the same time, dividend repatriation by multinationals is resulting in a structural massive deficit in the income balance (30% of GDP). Excluding multinational-related effects, the current account has been in surplus since 2015 (around 3% of GDP in 2022).
Stable political situation but growing nationalist support
The current coalition government – comprised of three parties, Fianna Fail, Fine Gael and the Green Party, the former two being historic rivals – came into power in June 2020, after four months of negotiations. It was agreed that Micheál Martin, leader of Fianna Fáil (centre), should be Taoiseach (Prime Minister) for half the tenure, whereupon Leo Varadkar (Fine Gael, centre-right) would take office. The reshuffle was completed in December 2022 and the arrangement has generally been stable. Given that the current coalition has governed without a combined majority in polls over the past few years – Sinn Féin (with a left-wing agenda, but above all in favour of reunification with Northern Ireland) had a historically strong election score in 2020 winning 24.5% of the vote, and averaged around 33% through 2021 and 2022 – a general election is not expected to be called in 2023. The country must go to the polls in or before March 2025.
The Northern Ireland Protocol caused an election in Northern Ireland in 2022 – after the sitting First Minister (Paul Givan, Democratic Unionist Party) stepped down in protest over the Protocol – that resulted in the Northern Irish Sinn Féin securing 29% of the votes, giving them largest-party status for the first time in history. Sinn Féin is thereby the largest sitting party in both (the Republic of) Ireland and Northern Ireland. This along with Brexit and demographic changes is causing more frequent discussions around a potential referendum on Irish unification, however an actual vote is mainly seen as plausible in 5-10 years’ time, with the majority still against it in Northern Ireland.
The recent Windsor framework, announced in February 2023, has improved relations between Ireland and the UK, and will improve trade as well. However, the Stormont Assembly, the devolved legislature of Northern Ireland, is still suspended, highlighting that political tensions are still there.