Irish economic outlook | July 2021

Despite the third lockdown in early 2021 Irish GDP (gross domestic product) rose by 2.5% on the quarter, up by 11.8% on the year. However, the startling figures merely reveal the national accounts measure is an increasingly irrelevant barometer of the health of the Irish economy. The detail reveals that multinational sector output was up 25% in the year to Q1, whereas indigenous sector output was down 10%.

Employment gains

Short-term indicators point to a strong rebound in the second quarter of 2021. Pandemic Unemployment Payment (PUP) claims have halved from a peak of 481,000 in February to 244,000 in the final week of June.

The decline in jobless claims has happened in tandem with the re-opening of the economy which began with the construction sector in April, non-essential retail in May, and with remaining restrictions on hotels and restaurants scheduled to be lifted in July. However, there is still some way to go before fears of lingering unemployment can be put to rest.

Indeed, the Irish government will be watching the labour market data to see if the decision to extend household income and company support schemes such as the wage subsidy scheme out to end-2021 will fall within the €3.5bn estimated cost.

Thoughts for Budget 2022

For now, difficult decisions on the public finances have been put off. The Irish Fiscal Advisory Council (IFAC) has warned tax rises may be necessary to bring the budget deficit down and pay for commitments in the programme for government such as the rollout of Sláintecare and demographic pressures on the public finances. It remains to be seen whether these unpalatable choices will be faced up to in October’s Budget for 2022.

The Irish housing market never fails to garner public attention. The latest MyHome asking price data shows asking prices rose by an enormous 12.9% in the year to Q2 2021. The message here is that homebuyers are bidding up prices aggressively, faced with an exceptional lack of homes for sale on estate agent’s books.

Hence, we now expect Irish house price inflation to equal 8% through 2021. The news on accelerating house price inflation will only intensify the pressure on the government to deliver on the housing issue ahead of the next election.

Corporation tax pressure

The decision by the G7 countries to agree proposals for a new minimum effective 15% corporate tax rate and new sales-based tax has placed focus back on Ireland’s tax regime. However, even if Ireland eventually raises its rate to 15% we don’t believe this will undermine the country’s attractiveness as a location for FDI (foreign direct investment).

Our main competitor, the UK, is now outside the EU single market and is planning to raise its corporate tax rate to 25% from 2023. The Biden administration is negotiating to raise the US rate to 28% although it may well compromise and agree to a lower rate. Either way, Ireland will maintain a competitive rate. The more pressing concern is that infrastructural bottlenecks and the housing issue may dissuade further FDI from coming to Ireland – but for now the outlook is very favourable.