Ireland’s Reliance on Foreign Money Shakes its Stability

As has consistently been the case in recent years, Ireland’s economy is outperforming many of its European counterparts. According to the Central Statistics Office (CSO), GDP was up 1.8% in Q2 2022, compared with the previous quarter. This represented an 11.1% rise in real terms on Q2 2021, eclipsing the 2.4% GDP growth recorded at EU level for the same period.

Ireland will likely avoid a recession in the near term, though a widespread economic downturn across Europe will cause domestic growth to slow.

The Economic and Social Research Institute (ESRI) expects Irish GDP to grow by 8.1% in 2022, before slowing to 4.4% in 2023. Growth in modified domestic demand (MDD), which better represents domestic economic activity, is forecast to slow to 2.5% in 2023, from 7.5% in 2022.

The success of major multinational tech and pharmaceutical companies using Ireland as a gateway to Europe bolstered Ireland’s public finances during the pandemic, when other countries’ government budgets were being drained. This leaves Ireland better placed to tackle economic headwinds stemming from Russia’s invasion of Ukraine, insulating households from cost-of-living pressures.

Financial Services and Real Estate

UK economic woes threaten to derail financial services

• Despite loosening its ties with the UK financial sector since the global financial crisis, the Irish financial sector remains tied with the UK. The financial services sector is one of Ireland's primary recipients of foreign direct investment (FDI).
• Turmoil in UK financial markets and the prospect of a prolonged recession in the UK have sparked contagion fears in the domestic financial sector.
• Efforts have been made to decouple Ireland’s financial sector from the UK, though liquidity constraints for transnational corporations based in the UK and other key trade partners threaten to reduce FDI flows.

Faltering competition presents an opportunity for lenders to grab market share

• The exit of Ulster Bank and KBC from the Irish banking sector presents a significant opportunity for the three remaining banks to pick up a share of the €30 billion in loan books left behind.
• Rising interest rates spell good news for banks, as they can increase rates on existing products.
• Contrary to this, inflationary pressures and a looming economic slowdown have increased the likelihood of a rise in default rates, while rising interest rates will weigh on demand for new loans.

Rising borrowing costs spur a cool-down in residential markets

• According to analysis of Ireland’s house price-to-rent ratio from the ESRI, Irish house prices are overvalued by at least 7%. Since the pandemic, an undersupply of housing and a surge in household savings have pushed up house prices.
• Rising borrowing costs and economic uncertainty mean Ireland could be heading for a correction in house prices in the next 12 months.
• Rising interest rates threaten office and industrial markets. Retail assets remain attractive for investors that have already adjusted to the risks posed by e-commerce and the impact of COVID-19.

Consumer Products

Inflationary pressures weigh on domestic demand

• Soaring energy and fuel prices have started to filter through to consumption habits, with growth in personal consumption slowing to 1.8% in Q2 2022, according to the CSO.
• Overall consumption climbed in Q2, compared with Q2 2021, though retail sales have dipped.
• With inflation forecast to persist over the next 12 months – moving from 8.1% in 2022 to 6.8% in 2023 – the squeeze on household consumption will plague supply chains.

The worsening global economic outlook raises concern for exporters

• With Ireland forecast to escape a recession over the next 12 months, sectors that rely on exports to other European countries are most susceptible to the global economic slowdown.
• Exporters will be keeping a close eye on the economic performance of key trading partners, most notably the US and the UK.
• Sectors that rely on exports to the UK (e.g. the agri-food sector) are most at risk of a downturn. Fluctuations in the euro-to-pound exchange rate and UK insolvencies will impede key income streams.
• A depreciation in the euro-to-dollar exchange rate should protect Irish exports, though companies with US dollar costs face mounting cost pressures.

Energy Resources and Industrial

The government has intervened to mitigate soaring energy costs

• Russia’s invasion of Ukraine has compounded existing supply issues, which have skyrocketed wholesale energy prices across Europe, with Single Electricity Market Day-Ahead Market prices peaking at a monthly average of more than €387 per megawatt hour in August 2022.
• Prices fell back in autumn but will remain volatile over the next 12 months amid ongoing uncertainty surrounding the supply of Russian fossil fuels into Europe.
• A windfall tax imposed on the excess market revenue of electricity-generating companies will raise as much as €1.9 billion for the Exchequer, helping to fund a €4.1 billion package of one-off cost-of-living support for households and businesses.

Rising input costs limit construction output

• Inflationary pressures across the construction sector have contributed to the ESRI downgrading its housebuilding forecasts. An estimated 28,000 houses are expected to be completed in 2022, with 26,000 completions forecast in 2023.
• According to the CSO, a slowdown in the construction sector is already apparent, with construction activity falling by 2.7% between July 2022 and September 2022.
• Following a notable acceleration in investment in the first half of 2022, deteriorating economic conditions and ongoing cost pressures will weigh on construction investment over the next 12 months.

Technology, Media and Telecommunications

Early signs of a slowdown in Ireland’s tech sector

• Ireland’s reliance on big tech leaves it exposed to fluctuations in global economic conditions, particularly in the US where many of these firms are based.
• Recent job cuts among tech giants Meta, Twitter and Stripe point towards a cool down in the sector, while the prospect of a US downturn presents a threat to the profits of major multinationals located in Ireland.

Opportunities for expansion in the technology sector

• Ongoing digitalisation trends are creating significant opportunities for growth in the technology, media and telecom (TMT) sector.
• Despite a planned increase in the corporation tax rates paid by large multinational countries, Ireland will continue to attract FDI in the digital economy over the next 12 months.
• The TMT sector will continue to be a key driver of Irish M&A activity over the next 12 months. The sector accounted for nearly 30% of Irish M&A in value terms during the first half of 2022.