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Saturday, April 13, 2024

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Ireland

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GDP: USD529.2bn (World ranking 27)

Population: 5.1mn (World ranking 123)

Form of state: Parliamentary Republic

Head of government: Leo Varadkar (PM)

Next elections: 2025, Presidential

Strengths

  • Strong business environment
  • Robust current account surplus
  • Strong fiscal position
  • English-speaking business location

Weaknesses

  • Sensitive to external shocks due to high openness to trade
  • High dependency on foreign investment
  • High private debt

Economic overview

A regular Eurozone outperformer

Ireland has consistently outperformed other Eurozone countries, with growth rates of +6.2% over the past 30 years and +9.1% over the past 10 years. This impressive economic performance can be attributed in part to the expanding presence of multinational corporations (notably in the technology, pharmaceutical, chemical and financial sectors), which have become integral to the Irish economy, accounting for over 50% of GDP and employing approximately 10% of the labor force. However, 2023 showed the downside of this dependency, as the environment of higher interest weighed on global demand while consumers’ resilience has also reduced and dragged the country into a recession, to an estimated -2%. Looking to 2024, a modest +2.6% rebound in GDP is expected as these economic pressures should ease. While households’ saving rate is back to pre-pandemic levels, the tightness of labor market should provide limited support with nominal wage growth above 4% along a disinflationary trend (inflation expected to fall to 2% in 2024).

Moderate medium-run vulnerabilities

A key reason behind the sizeable presence of multinationals in Ireland has been its attractive low tax environment, which has lured substantial foreign investment. However, in 2022, Ireland introduced changes to the international corporate tax framework. These changes included the reallocation of profits of multinational companies across different states and an increase in the tax rate for large companies from 12.5% to 15%. This could mean that higher taxes on the domestic economy are needed as corporate tax revenue is the secondlargest single source of revenue, standing at more than half of the increase in total revenue since the Covid-19 crisis. On the positive side, the external account is strong: the current account surplus should continue to stay above 5% thanks to the recovery in global trade which should strengthen Ireland’s net exporter position. In the medium run, Ireland’s trade structure remains a vulnerability in terms of the dependency on pharmaceuticals and computer services. In addition, in terms of destinations, export concentration is high as the US and the UK represent around 40% of total Irish exports. The strong presence of the multinational sector makes Ireland appear very vulnerable in terms of external debt but being part of the Eurozone makes it manageable. In addition, the rapid and strong global tightening in monetary policy has led to a correction in house prices as of mid-2023 which should continue into 2024 on the back of lower housing affordability and less support from the multinational sector. The banking sector in Ireland is in good health with profitability being boosted by rising net interest margins and a strong deposit base. Net interest margin is close to 3% compared to 2% pre-pandemic. NPL ratio stands below 3% compared to close to 5% pre-pandemic, but an increasing trend is expected due to deteriorating households’ and firms’ balance sheets and higher borrowing costs. Household debt stands at 108% of net disposable income, above US levels, but 40pp below UK levels. Business insolvencies have returned to pre-pandemic levels and should increase by +12% in 2024, to 760, highest level since 2018. The fiscal balance should continue to register a small surplus in the coming two years. Additionally, public debt has been kept under control, decreasing from pandemic peaks of 58% of GDP to around 43% in 2024, presenting an overall strong fiscal position. To further stabilize future public finances against the volatility of corporate tax receipts, the government is in the process of establishing a sovereign wealth fund. This fund aims to strategically invest the windfall revenues generated from corporate tax revenues. The size of the fund is expected at EUR100bn by 2035 with a rate of return of close to 4%. A second fund of EUR14bn is planned which intends to finance green infrastructure but also support catch-up on targets to cut greenhouse gas emissions.

Business environment and political developments

Ireland’s business environment is notably strong, scoring highly in regulatory quality, rule of law and corruption control. Ireland also has a very well-educated labor force and enjoys a significant openness to foreign trade and FDI. Starting a business, protecting minority investors, paying taxes and resolving insolvencies are ranked at the top among other OECD high-income countries. However, going forward, the introduction of the minimum global corporate tax reform is expected to modestly dampen Ireland’s attractiveness, particularly for multinationals. The 2020 general elections resulted in a three-party governing coalition (Fianna Fail – center-right, Fine Gael – center-right and the Green Party – center-left) and is the most fragmented parliament in recent history. Under the terms of the coalition agreement, Leo Varadkar of Fine Gael became Taoiseach in December 2022, following a rotational arrangement with Fianna Fáil. This transition of power occurred smoothly, but with the general elections approaching (due by March 2025), there are expectations of potential challenges within the coalition, as parties may reassess their positions if they believe this will play better with their voters.

CEOWORLD magazine - Insights - Ireland