With clouds over the UK, the sun is still shining on the Emerald Isle.
Blue skies in Dublin. Photo: Pixabay
Soaring inflation and rising borrowing rates are undermining global economic activity, which will only get worse as the winter approaches and energy shortages arise.
On top of that there are political and policymaking risks, and countries are having to absorb even more debts as public spending rises on subsidies and civil-service wages.
Against this backdrop, Ireland seems well prepared. Despite being one of the most hard-hit countries during the global banking and subsequent debt crisis, the country has become steadily safer during the past decade, and not without justification.
Most recently, GDP increased on a seasonally adjusted, real-terms basis by 1.8% in the second quarter, bolstered by a double-digit rise in investment.
Most countries in the world are likely to experience a recession over the coming year, which will reduce demand for Irish exports, but there should be a recovery in the world economy after that- Bruce Morley
This led to 11.1% year-on-year growth, after 10.8% in the first quarter, with GNP – a measure excluding the profits of multinationals – up by 8.8%. Consequently, the unemployment rate is just 4.3%.
On the back of this solid economic growth fuelling corporate tax receipts, the government is expecting a budget surplus at the end of this year worth 0.9% of GDP, providing additional public resources to support businesses and households through the economic difficulties that are now occurring.
Hence, after climbing to a peak of some 132% of GDP in 2013, the gross debt burden has eased to 85% of GDP. This is less than the UK’s ratio of 114%; and the UK, of course, has a sizeable public deficit that is worsening in the short term.
What is more, Ireland’s risk score fell only marginally in the first half of this year, and far less than the UK and most other European countries.
Euromoney’s panel of country risk experts have been flagging these relative advantages, resulting in Ireland flying high in Euromoney’s global risk rankings, at 15th out of 174 countries. This puts it on a par with Belgium, Estonia, Iceland and Austria, in relative risk terms. Compare that with the UK, down at 43rd, with its higher political and economic risks.
One of the survey contributors is Bruce Morley, a lecturer at the University of Bath. He says the projections for the Irish budget deficit are on a downward trajectory for the near future, so the Irish debt levels should be manageable.
Another survey panellist, Constantin Gurdgiev, associate professor of finance at Monfort College of Business (MCB), says the government’s 2023 fiscal budget “is cautious enough to maintain significant expected fiscal space between the forecast receipts and expenditures, while being sufficiently expansionary to provide support for domestic economic growth should the global growth shocks remain moderate, as they are to-date”.
Of course, there are still some risks, the cost of living for example, although it should peak in the latter half of the year, then fall back, says Morley.
Eurozone interest rates are also likely to continue to rise in the near-term without any quantitative easing (QE) for the near future.
“Most countries in the world are likely to experience a recession over the coming year, which will reduce demand for Irish exports, but there should be a recovery in the world economy after that,” Moley notes.
2023 and 2024 are likely to prove pivotal years to Ireland, as the OECD tax reforms mature and uncertainty around the regime applicability and specifics get ironed out- Constantin Gurdgiev
Brexit-related risks are also a feature where Ireland is concerned.
So far, the impact of Brexit on the Irish economy has been limited, but Morley says it is not clear yet how the UK and EU/Ireland will find an agreement on the issues of trade between Northern Ireland and the rest of the UK.
As for the fiscal metrics, Gurdgiev says the budget misses the point on the need to accelerate investments in energy infrastructure.
Also, the risks to Ireland’s fiscal position in 2023 will most likely arise from the threat to Irish economic growth largely driven by the external economic shocks, plus the longer-term uncertainty as to the stability of Irish corporate tax receipts.
The University of Bath’s Morley says that given that most countries have corporate tax rates above 15%, especially in the EU, “the moves to the recently agreed minimum tax rate shouldn’t affect Ireland too much, at least in the short-term”.
Gurdgiev at MCB partially agrees, noting that Ireland appears to be weathering well the starting stages of the OECD/EU tax reforms. However, he also warns that the Irish Exchequer remains extremely exposed to any potential volatility in corporate and income taxes that arise from the multinational corporations activities in the Republic.
“In this context, 2023 and 2024 are likely to prove pivotal years to Ireland, as the OECD tax reforms mature and uncertainty around the regime applicability and specifics get ironed out,” he says.
Ireland is not riskless in that respect, but it does offer relative political stability, fiscal budget strengths and favourable economic growth. Compare that with the UK and it is easy to see why the country is 28 places higher on the global risk ratings.