What problem was ireland facing?
Ireland’s economy is expanding strongly – for now. But cost-of-living concerns loom big
Ireland’s economic growth continues to beat the euro zone average in the second quarter — but the nation is still battling with the same cost of living and energy security issues as its rivals.
Government estimates indicate Irish gross domestic product expanded by 1.8% quarter-on-quarter, led by stronger consumer and corporate expenditure, but it was down substantially from the 6.3% rise registered in the first quarter.
Gross national product — which strips away earnings from the numerous international corporations who are located in the country, and account for 54.8% of its GDP — rose 2.1%.
In contrast, the euro zone economy as a whole increased by only 0.8% in the second quarter compared with the previous three months.
A decrease in euro area economic activity has some economists, notably at the Royal Bank of Canada and ING, suggesting the EU is likely to face a recession sooner than previously predicted. The U.K. economy, however, lost 0.1% on the quarter despite similar recession forecasts.
And there are worries Ireland’s economy may not continue so strong.
“A number of indications imply that momentum has lessened in the third quarter, while the forecast over the future quarters has worsened considerably,” Irish Finance minister Paschal Donohoe said in a statement Friday.
Ireland is under the same challenges as its peers over the cost of living and energy security.
A flash estimate provided by the European Union’s statistics office showed Irish inflation at 8.9% in August, barely below the euro zone average of 9.1%.
And things are set to become worse, according to Conall Mac Coille, chief economist of Irish financial consultant Davy, given soaring home heating prices in winter. Utility provider Electric Ireland has indicated that domestic electricity costs would be 26.7% higher and gas bills 36.5% higher from Oct. 1.
Gerard Brady, director of national policy and chief economist at Irish business lobbying organization Ibec, told CNBC there is “no doubt” firms are beginning to feel the squeeze as costs increase in energy, commodities and transport.
“That’s putting a lot of pressure on operational margins. It’s in every industry as well, it’s a wide economic shock,” he told CNBC by phone.
“Consumers will really feel the blow when winter hits, but companies are already seeing costs three to five times higher, so for energy-intensive sectors it’s a tremendous challenge.”
That includes dairy companies, which contributed 16 billion euros ($15.9 billion) to the Irish economy last year, according to trade organisation Dairy Industry Ireland.
Its director, Conor Mulvihill, told CNBC that many firms have raised their sales over the previous year, but this has been “absolutely obliterated” by greater expenses in the areas of animal feed, fertiliser, petrol, and electricity in particular.
A tight labor market, with Irish employment at a record high of 73.5%, also means it has been a difficult for employers to attract and maintain people, Mulvihill added.
With its strong linkages to the European energy market — and notably the U.K.’s, from which it imports approximately 75% of its gas — Ireland confronts similar fears about the possibility for shortages this winter. Energy provider National Grid, which handles U.K. power lines, says Ireland will not be cut off — although blackouts in both nations remain a possibility.
As preparations to weather the winter cost-of-living storm emerge from various European governments, Ireland is set to unveil energy bill grants and other assistance measures worth 6.7 billion euros in its 2023 budget on Sept. 27.
The country’s present economic condition does allow it greater freedom. Figures published in August indicated state finances evolved from a Covid-era deficit into a surplus of 6 billion euros.
Multinationals in the country, many of which have been lured by its low 12.5% corporate tax rate, including technological titans like as Alphabet\s, Meta\s, Intel\s and Amazon\s; and medical corporations like Pfizer\s and Johnson & Johnson\s.
The greater earnings produced by these corporations during the epidemic helped power a 30% year-on-year jump in corporate tax last year, reaching 15.3 billion euros — about the same as it collected in value added tax.
What problem was ireland facing next.
The dominance of a cluster of firms does leave Ireland susceptible to sector-wide slowdowns, Davy’s Mac Coille warned.
A projected raise in the corporation tax rate to 15% has also led to doubts about whether the relatively tiny economy can retain its attraction to major businesses.
On the consumer spending side, the present increasing trend also seems unstable, with a consumer mood index from KBC Bank plummeting in August to a late-2020 low.
And for many, new economic concerns play out in front of a protracted and deepening housing crisis.
Asking prices for homes are up 11% year-on-year, according to property website Myhome.ie, while rental costs surged to an all-time high in August after climbing 12.6%, statistics released by Daft.ie indicated.
Rachel, a 27-year-old HR professional from Kildare who is presently apartment searching in Dublin, says she has been startled by how much worse the situation is since she arrived to the city four years ago.
“I’m monitoring property sites on my phone regularly and by the time I’ve clicked the link, the ad has been taken down,” she told CNBC. The quality of what you can receive for the same money has degraded, she added, and she and her friends are under pressure from increased costs.
“For renters, and particularly for individuals most in need — in energy poverty, on pensions — there is a great worry surrounding what the winter brings. People are terrified of the uncertainty and are clearly looking to the budget,” she added.