Ireland heavily exposed to economic change in US

The growth rate of the Irish economy is set to halve to around 1.4% by the middle of the century as the working-age population declines, the final Central Bank quarterly  of 2024 states.

Longer working years and productivity growth can partly offset this decline, the regulator has said, as well as an expansion of the tax base to maintain public services.

Despite steady growth and lower inflation, geo-economic risks are rising in the economy, the bulletin adds. 

The possibility of escalated global trade tensions is rising, presenting significant downside risks to the public finances and the Irish economy.

Robert Kelly (director of economics and statistics) said: “The domestic economy has managed to grow at a steady pace in 2024, supported by an expansionary fiscal stance and weaker external inflationary pressures. 

“The central outlook for the domestic economy is favourable going into 2025.  However, with the economy operating above its potential, Ireland’s current infrastructural constraints will limit further sustainable growth. 

“These constraints add to the structural vulnerabilities in the economy and public finances, making the near-to-medium-term outlook exceptionally sensitive to global economic developments.”

The ability to sustainably deliver infrastructure was especially important in a small open economy, to maintain incentives for foreign investment, he added.

Fragmentation

With the rising risk of geo-economic fragmentation, and extensive Ireland-US trade and investment links, the Irish economy was particularly susceptible to changes in US policy on trade and tax, he pointed out.

“While specific policy actions of the incoming US administration are yet to emerge, higher tariffs or changes in tax regimes that reduce the profitability of US MNEs’ operations in Ireland could influence future investment decisions by those companies here, employment levels in their Irish operations and, most immediately, the related tax receipts to the Irish exchequer from their activities in Ireland and globally.

“A dependence has emerged on the substantial corporation-tax receipts of recent years, linked to the activities of US MNEs,” Kelly said.

Long-term needs

Only one-third of estimated excess corporation-tax receipts were being diverted to the long-term savings funds to address needs in terms of infrastructure, climate and ageing, with the remainder financing within-year Government expenditure, Kelly said.

In the first nine months of 2024, employment grew by 2.8%.

This follows a similar pace of expansion in 2023.

With the jobless rate averaging 4.5% for almost three years, the economy is at full employment and risks overheating.

Net inward migration and greater labour-force participation saw employment rise by 88,400 in the first nine months of 2024, lifting the in-work ratio of the total 15-64 population to just below 75.3%, the highest on record.

With some easing of labour demand expected, nominal wage growth is projected to slow in 2025 and 2026, but remain above 4%.

Growth in residential construction stalled in 2024 but is projected to pick up in 2025, based on the large number of housing commencements registered this year.

Domestic demand

The government’s budgetary stance continues to add demand to the economy, the Central Bank also said.

Modified domestic demand expanded by just over 3% over the first nine months and is forecast to grow by 3.1% in 2025 and 2.5% on average in 2026 and 2027.

Households’ real incomes are continuing to rise, with inflation expected to remain below 2% on average over the forecast horizon.

Combined with further growth in consumer spending as gross disposable incomes rise, modified domestic demand  is forecast to grow by 2.5% on average in 2026 and 2027.

Disposable income – which includes wage and non-wage income and social transfers – is forecast to grow by 4.7% in nominal terms on average from 2025-27.

When combined with the projection for inflation, real income growth per household is forecast to average 1.8% over the same period, bringing average household purchasing power to 8.4% above its 2023 level in 2027. 

Pharma and IT

The MNE-dominated sector is adding to overall economic growth in 2024 through the strength of pharmaceutical and ICT services exports.

Although external demand conditions are weak by long-run historical comparison, net exports are projected to support economic activity out to 2027.

Externally influenced price pressures have substantially waned, with domestically driven services inflation becoming the largest contributor to overall price changes.

Food inflation drops

Inflation for energy and non-energy goods was negative to date in 2024and food inflation had dropped sharply, the Central Bank said.

A range of measures of underlying inflation points to a 2% current rate, with downward momentum.

Services inflation is forecast to average 3.1% from 2025-27, close to its long-run historical average, with the headline rate projected to average 1.8% over the same period.