Irish Economy on the Rise
Alan McQuaid is a leading economist and media commentator. He has previously worked with the Department of Finance and several Irish firms including both Merrion Stockbrokers and Cantor Fitzgerald Ireland. This month he has given us his current market analysis for Q4 2021, going into 2022.
Despite the ongoing uncertainty caused by the Covid-19 pandemic across the globe, the Irish economy continues to recover strongly. The most recent figures from the Central Statistics Office show that the economy – as measured by GDP – grew by 6.3% in the second quarter of 2021 compared to the first three months of the year. On an annual basis, GDP posted growth of 21.6% in the second quarter, as the economy was in the depths of the Covid-19 crisis last year. In the first half of 2021, GDP was 16.3% higher in real terms than the same period in 2020 and was 20.8% higher than the first quarter of 2019 (pre-Covid-19).
All in all, the Irish economy grew three times faster than the Eurozone average in the second quarter and now looks on course to post real GDP growth of between 15% and 20% this year, a phenomenal performance all things considered.
The country’s unemployment rate, including people receiving temporary Covid-19 jobless benefits, fell to a new pandemic low of 10% in September from 12.4% in August. The unemployment rate – including those getting the Pandemic Unemployment Payment (PUP) – stood at 15.9% in September of last year. Excluding recipients of the PUP, the jobless rate fell to 6.4% from 6.5% the month before. The Department of Finance forecasts that the overall unemployment rate will average 7.2% next year and fall to 6% in 2023 as the economy continues to recover.
On October 12, Budget 2022 was presented to the Dáil. Finance Minister Paschal Donohoe said the cost of running the country would be €87.6 billion and that he had €4.7 billion to increase public spending and reduce taxes. Most of that amount (€4.2 billion) is going on public spending. To accommodate people working from home he introduced a 30% tax rebate on vouched expenses for heat, electricity and broadband. The Minister said the 9% VAT rate on the hospitality sector would be extended to the end of August 2022. To help reach the Government’s target of building 33,000 houses a year until 2030, he proposed a zoned land tax, but the opposition jeered when he made it clear it would be at least two years before it came into effect. On climate change, the Minister said “future generations will not tolerate inaction from the leaders of today”, adding that “they deserve action”. As a result, he raised Carbon tax by €7.50 per tonne (as set out in the Finance Act 2020).
Ireland has agreed to adopt a 15% minimum corporate tax rate after several months of negotiations with the Organisation for Economic Co-operation and Development (OECD). The Irish government insisted on the removal of the term “at least” 15% with regard to the amount each country should charge and demanded a guarantee that it won’t be forced to increase the amount at a later date.
The 15% rate will only apply to multinational giants with a turnover of more than €750m. The Department of Finance has estimated that the cost to the Exchequer from the rate being increased could be as much as €2 billion a year as companies now decide to go elsewhere, but even with a higher rate of 15%, Ireland remains a very attractive place to do business given its young, highly educated and flexible workforce.
Consumer prices rose by 3.7% in September, which was the biggest annual increase in inflation since October 2008. The main contributor to inflation was energy costs: electricity was up 20.5%, gas prices were up 14.2% and home heating oil was up 46% in the year. The Department of Finance has forecast that inflation will peak at 4.5% in the final quarter before falling back below 2% next year. However, it said the average rate could be closer to 3.5% in 2022 if there are higher energy prices, prolonged global supply chain disruptions and greater short-term economic demand.
House price inflation rose to a three-year high of 10.9% in August as panic buying, low borrowing costs and increased working from home fuel greater activity in the market. The average price paid for a home across the State is approximately €20,271 higher than it was 12 months ago while average prices in Dublin are €43,682 higher. Many had predicted property values would decline as a result of the pandemic but a number of factors – increased savings, home working and expatriates returning from London after Brexit – have led to an acceleration in prices.
Despite the sharp rise in inflation in recent months the majority of the ECB’s Governing Council believe the pick-up in prices is only transitory, caused in the main by supply chain disruptions as a result of Covid-19. The latest economic forecasts from ECB staffers point to inflation falling back again below target over the next couple of years. However, prices are rising across the board as businesses try to recoup the losses they incurred, and economies return to some sort of normality. As a result, the ECB will probably be forced into remedial action sooner than it thinks.
Meanwhile, average interest rates offered to Irish mortgage borrowers have softened slightly over the past year, with the weighted average rate on new home loan agreements standing at 2.74% in August, according to figures from the Central Bank, down 9 basis points on August 2020, but the rates borrowers pay in the Irish market still remain well above the Eurozone average of 1.27%. We are seeing a steady reduction in the rates offered by various providers across the board, and this is likely to continue for the immediate future as the cost of credit remains low and competitors vie for business from Irish mortgage customers.