Irish economy performing well, but vulnerabilities remain
The Irish economy continues to perform well, with continued output growth projected, unemployment rates remaining low, inflation effectively managed, and the Government maintaining a budget surplus. The factors underpinning this success include a highly educated workforce, our ability to attract FDI, and strong growth in tech and pharma. However, vulnerabilities remain. As a small, open economy, Ireland is particularly susceptible to shifts in US trade policy. Geopolitical dynamics, including the ongoing conflict in Ukraine and the Middle East, make for a complex global economic landscape. While on the domestic front, Ireland’s infrastructure deficit poses a challenge to sustained growth.
GDP now understates the strength of the real economy
While GDP is the global standard measure of economic output, the true health of Ireland’s economy is better understood by observing modified domestic demand (MDD), which strips out distortionary activity such as investment in imported intellectual property and aircraft leasing. As the chart below shows, Ireland’s economy continues to perform well with MDD growth of 2.6% in 2023 and forecasted growth of between 2.3% and 3.1% per annum to 2026. The Department of Finance forecasts that MDD will grow at close to 3% per annum until the end of the decade.
MDD growth forecasts
Headline inflation has been tamed, but services inflation remains stubbornly high
Inflation has dominated economic commentary over the past two years, but that is changing. In Ireland, inflation has declined significantly. Various forecasts show the headline inflation rate in Ireland tracking close to the 2% target rate, as shown in the chart below. While headline inflation is broadly on target, inflation in the services sector has remained stubbornly high. The Department of Finance notes that core services inflation remains very elevated, with a rate of inflation in excess of 4% for 12 of the last 15 months.
Inflation forecasts for Ireland
There are one million more people working in Ireland than in the year 2000
With more people working in the State than at any point in its history, Ireland’s labour market is in good health. There are one million more people working in Ireland today than at the turn of the millennium. This is a particularly striking statistic given the occurrence of a global financial crisis and a pandemic in the intervening years. As the chart below shows, the labour market has rebounded strongly since the pandemic and continues to grow. In September, the unemployment rate stood at just 4.3% with the economy approaching full employment.
Persons aged 15+ by employment status
Windfall corporation tax receipts see the Government running a surplus
As Budget 2025 coverage outlined, the State is in a relatively strong fiscal position. The general government balance — the difference between revenue and expenditure — is in surplus. That surplus is projected to amount to almost €24 billion in 2024, including windfall corporation tax income and the funds resulting from the ruling of the European Union’s Court of Justice. As the chart below shows, tax revenues have grown dramatically since the beginning of the pandemic. The Department of Finance expects revenues to level off by 2026. All else being equal, it is likely that corporation tax receipts will increase further with the introduction of BEPS Pillar 2.
Government revenues by tax category
Earnings growth has not kept pace with the cost of housing
While average hourly earnings increased by 25% between 2019 and 2024, the gap between earnings and housing costs has been widening for years. Recent real wage growth is due to a combination of increased wage demands caused by inflation and a tight labour market. Unemployment remains low at 4.3% and inflation is tracking close to the 2% target rate. However, with ever-increasing housing costs, many remain locked out of the housing market. As the chart below shows, rents and property prices followed a similar pattern over the past decade, growing at a faster rate than earnings.
Residential property prices and rents continue to rise
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PwC Quarterly Economic Digest — Q4 2024
Explore the forces driving the Irish economy’s performance.
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