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Recession or boom – Which is it for the Irish economy?

Tom McCabe • 07/12/2023

There’s been plenty of Irish economic data released over the past number of weeks, but many could be forgiven for engaging in some head scratching around the economy’s direction given last week’s news from Ireland’s Central Statistics Office (CSO) that Ireland moved into recession in Q3.

Let’s dig into some of the more important recent releases and what they mean for Ireland’s near-term economic outlook.

Q3 GDP – confirms recession with exports weighing on activity through 2023

Last week the CSO released the national accounts for the third quarter of the year. The key headline was that GDP had contracted through the first three quarters of the year, thereby confirming what economists call a ‘technical’ recession i.e. consecutive quarters where the economy shrinks (see Q3 performances below across the various expenditure categories).

Expenditure-Components-chart

But the overall GDP recession ‘pattern’ masks a big difference between what is happening on the ground in the domestic economy and what is happening in the export sector which is more exposed to a slowing global economy in recent months.

In the traded sector of the economy exports have fallen through the course of 2023 from the high levels achieved in 2021 and 2022. This also appears to have been skewed somewhat by lower exports from sizeable sectors such as the pharmaceutical sector and this weakness in exports has largely been the driving factor behind Irish GDP growth forecasts being trimmed over the past number of months.

In contrast consumer spending in the domestic economy grew again by 0.7% in Q3 and has grown throughout 2023 according to the CSO.

This is one of the main snags in trying to analyse the performance of the Irish economy currently. In short, domestically the economy is still performing solidly but the more international facing parts of the economy are finding the going tougher.

The clearest evidence of the strength in the domestic economy comes from the jobs market. And the latest update on this from the CSO last week shows that Irish employment levels hit another all-time high in Q3 of 2.66 million with unemployment remaining very low at 4.5% and wages still growing by 4.6% in Q3 compared to a year earlier, all of which should support consumer spending.

In addition, Irish households have also accumulated approximately €150 Billion on deposit in recent years while household debt to disposable income has also declined consistently from a peak of 210% in 2009 to 89% now. Together this puts Irish households and consumers in particular in a much stronger position to deal with any economic ‘bumps in the road’.

Total-Irish-Employment

Irish-Employement-Hits

Tax receipts are also a good underlying indicator of the performance of the economy. As we can see from below, when we measure tax receipts over rolling 12-month periods the trajectory for categories like income tax and VAT still points to a solidly performing domestic economy. The corporation tax take is more difficult to predict and has slowed somewhat in recent months.

However, the November 2023 tax take of €6.3 Billion marked a sharp rebound. In our view the longer-term receipts from this category are likely to revert back to more normal levels as opposed to the outsized levels seen in the past 18 months, something the government has stressed in recent times.

Rolling-12-month-tax

In October’s budget the government also unveiled a total fiscal package to the tune of €14 Billion for next year, almost 3% of Irish GDP. This support should help underpin the government’s growth forecasts for 2024 (see table below), particularly against a more uncertain international backdrop.

Irish-Department-of-Finance

Finally, it’s clear from November’s Euro area and Ireland inflation data that the inflation problem over the past two years is easing rapidly (see chart below). The much better news here is raising hopes that the ECB will cut interest rates next year. At this point most economists are still expecting interest rate cuts to commence from Summer 2024 onwards but with the final ECB monetary policy meeting of 2024 scheduled for next week it will be interesting to monitor any changes to the Bank’s guidance on this front.

Euro-Area-Inflation

Ireland’s status as a very open, export focused economy can sometimes mean that GDP numbers somewhat mask what is happening ‘on the ground’ in the Irish economy. With exports easing in 2023 from their recent high-water marks amid a broader slowing of the global economy and GDP data pointing to a ‘technical’ recession we would argue that now is one such occasion.

As we move towards the new year the biggest risk for Ireland’s economy remains a familiar one, a sharp slowdown in economic activity globally. However, in general Ireland’s economic forecasts for 2024 and 2025 point to continued solid performance which should support real estate fundamentals over this period. The underlying trends that we see in indicators such as the labour market and in tax revenues together with the impact of Budget 2024 give us confidence that such a solid performance can be achieved. So, all in all we see the economy’s glass as being more ‘half full’ than ‘half empty’ as we move into the new year.

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Insights • Economy

Recession or boom – Which is it for the Irish economy?

Let’s dig into some of the more important recent releases and what they mean for Ireland’s near-term economic outlook.
Tom McCabe • 07/12/2023

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