Expert insights from Jim Power, Economist. This thought leadership article has been written exclusively for IoD Ireland.
The global economic backdrop is somewhat more optimistic today than a year ago. Global inflation has come down more quickly than expected, with the headline rate currently at 2.4 per cent in the Euro Zone and 3.5 per cent in the US. The rate of price increase is not quite there yet, but the omens are good.
In relation to the global economic outlook, there is a bit more optimism today than we have seen for some time. The Euro Zone economy experienced a mild technical recession in 2023 but returned to growth in the first quarter of this year. The IMF believes that global growth will be a bit stronger over the coming year, helped by lower energy prices, interest rates and inflation. The risks to global growth are obvious, and mainly revolve around global geo-politics. It is a very big year for elections around the world, with the European Parliamentary elections in June and the US election in November arguably the most important. The performance of the far-right in Europe and Trump in the US will need to be watched very carefully. In addition, there are a lot of wars going on around the world, with Gaza and Ukraine the highest profile. In summary, the global geo-political backdrop is not very reassuring.
One of the topics of speculation now concerns the timing and magnitude of interest rate cuts. Over the past six months market sentiment has gyrated wildly in relation to the path of interest rates. It now appears that the Federal Reserve will not cut for some time as the US economy is still proving very resilient and there is no reason to cut rates. The Euro Zone rate outlook appears somewhat clearer. Although recovering, the Euro Zone economy is still quite tepid, and it is likely that the ECB will start to gradually loosen monetary policy from June onwards. It is always difficult to predict precisely what a central banker might do, but the evidence suggests that rates will come down. It is not likely that rates will go back to the historical lows of recent years, but I would expect the ECB to trim around 2 per cent off its rates over the next 18 months.
Here in Ireland, the economic story is still quite positive. The labour market remains very tight with record levels of employment and a virtually full-employment level of unemployment at 4.3 per cent. Tax revenues are also holding up quite well, and the export performance is rebounding after a sharp post-Covid reversal in 2023, mainly in the pharma sector.
Stability Programme Update
The Department of Finance has just published its Stability Programme Update. It believes that data published since its autumn assessment present mixed signals, but on balance, the evidence points to an economy that is in reasonable shape, at least in aggregate terms. It pointed out that some areas of the economy, especially the labour market, remain resilient, and that inflation is easing faster than anticipated. However, it pointed out that there has been some loss of momentum in areas such as consumer spending and private sector investment. This is reflecting the reality.
The next 18 months
I am relatively optimistic about Ireland’s prospects over the next 18 months, but with some reservations. While inflation is falling fast (1.6 per cent in April on the EU measure); wage growth will exceed average inflation this year; interest rates look set to gradually come down; Budget 2024 and other Government corporate welfare measures will inject significant stimulus into the economy; and Ireland’s export sector is likely to put in a stronger performance than last year. On the less positive side, the external economic and geo-political environment is not without risks. Significant swathes of the SME sector are facing strong headwinds in the shape of the 12.4 per cent increase in the national minimum wage and related wage pressures; difficulties with recruiting and retaining staff; the impending increase in PRSI; impending changes to statutory sick pay; warehoused Revenue debt; elevated costs of doing business; and a consumer that is under pressure on the back of higher interest rates and the escalation in the cost-of-living over the past couple of years. The hospitality and retail sectors are most pressurised and the increase in the VAT rate from 9 per cent to 13.5 per cent last September has done no favours for hospitality.
Government in theory recognises these pressures and it remains to be seen what type of financial support will be forthcoming. The other big challenge is of course housing. Much of the discourse on housing is concentrated on social and affordable, but the reality is that the rental market and the owner-occupier market are more important from a national competitiveness perspective. Housing needs to be afforded the same ’emergency crisis’ status that was afforded to Covid, but the political system does not appear to fully recognise that fact. We need to act quickly and decisively to ramp up housing supply.
The Irish economy is in a relatively good place, but with three important elections on the horizon, it is vital that we don’t go the populist route and implement measures that could undermine the economic engine that generates the resources that fund public services and a functioning society.