Irish economy to continue to grow - but faces real risks if US policy changes

The Irish economy is set to continue to grow in 2025 but faces real risks from changes in global trade.

The forecast was made by the Central Bank of Ireland in their final Quarterly Bulletin of 2024.

The bank also warned, "with the labour market already at full employment, further demand stimulus could result in higher and more persistent inflation with a negative effect on Ireland’s relative competitiveness."

Without mentioning him by name, the Bank referenced incoming US President Donald Trump's threats to impose tariffs on imports as a future risk to American multinational enterprises (MNEs) operating in Ireland.

They warned: "As Ireland’s largest bilateral trade partner, the direct exposure of the economy and public finances to changes in US economic policy is material. 

"Policy changes affecting the activities of US MNEs in Ireland could lower net exports, domestic investment, employment, tax revenue, and economic activity more broadly relative to the central forecasts."

President Donald Trump in Ireland in 2019. (RollingNews.ie)

In their look back on the year, the bank said Modified Domestic Demand expanded by just over 3 per cent over the first nine months of 2024, with employment growing by 2.8 per cent which matched the rate of growth in 2023.

However, "with the unemployment rate averaging 4.5 per cent for almost three years, the economy is at full employment and overheating risks are present," the bank warned. 

It said a stall in construction levels this year looked set to pick up in 2025 "based on the large number of housing commencements registered this year."

They noted the government’s budgetary stance continues to add demand to the economy.

The bank said inflation has eased as "externally influenced price pressures have substantially waned with domestically-driven services inflation becoming the largest contributor to overall price changes.

"Inflation for energy and non-energy goods is negative to date in 2024 and food inflation has dropped sharply.

"A range of measures of underlying inflation – stripping out some of these more volatile components – points to inflation running close to or below 2 per cent currently, with downward momentum.

"The largest positive contribution to overall inflation in 2024 is from services and this pattern is expected to persist over the forecast horizon.

"Services inflation is forecast to average 3.1 per cent from 2025 to 2027, close to its long-run historical average, with the headline rate projected to average 1.8 per cent over the same period." 

The latest data shows the number of people at work continues to rise supported by net inward migration of skilled workers and improvements in labour force participation. 

Employment increased by 88,400 persons in the first nine months of 2024, lifting the ratio of the number employed to the total population aged 15-64 to just below 75.3 per cent, the highest on record.

The bank said the unemployment rate is expected to stay close to its current low level of 4.5 per cent.

But nominal wage growth is projected to slow in 2025 and 2026, although it will remain above 4 per cent.

Disposable income – which includes wage and non-wage income and social transfers – is forecast to grow by 4.7 per cent in nominal terms on average from 2025 to 2027.

And real income growth per household is forecast to average 1.8 per cent over the same period, bringing average household purchasing power to 8.4 per cent above its 2023 level in 2027.  

The bank did caution the tax base would need to be widened and people would in the future have to retire later to help mitigate the impact of an ageing population.

Robert Kelly, the Central Bank's Director of Economics and Statistics, said: “The domestic economy has managed to grow at a steady pace in 2024, supported by an expansionary fiscal stance and weaker external inflationary pressures. 

"The central outlook for the domestic economy is favourable going into 2025. 

"However, with the economy operating above its potential, Ireland’s current infrastructural constraints will limit further sustainable growth. 

"These constraints add to the structural vulnerabilities in the economy and public finances, making the near-to-medium term outlook exceptionally sensitive to global economic developments.”

“The ability to sustainably deliver infrastructure is especially important in a small open economy like Ireland’s in order to maintain incentives for foreign investment. 

"With the rising risk of geoeconomic fragmentation, and the extensive trade and investment links between Ireland and the US, the Irish economy would be particularly susceptible to changes in US policy on trade and tax.”

“While specific policy actions of the incoming US administration are yet to emerge, higher tariffs or changes in tax regimes that reduce the profitability of US MNEs operations in Ireland could influence future investment decisions by those companies here, employment levels in their Irish operations and, most immediately, the related tax receipts to the Irish exchequer from their activities in Ireland and globally.

"A dependence has emerged on the substantial corporation tax receipts of recent years, linked to the activities of US MNEs. 

"Only one third of the estimated excess corporation tax receipts are being diverted to the long-term savings funds to address needs in terms of infrastructure, climate and ageing, with the remainder financing within-year Government expenditure.”

*This article was originally published on BusinessPlus.ie.