Inflation in Ireland is already the lowest in the EU and is expected to crash through the European Central Bank (ECB) target of 2% by year-end, with an expectation of reaching a 1.2% inflation rate in 2025, according to the Economic and Social Research Institute (ESRI).
The comments came at the annual post-budget briefing by the ESRI on Friday.
This is good news for workers, who can expect the first real growth in earnings for some years, with forecast average wage growth of 4% in the coming year, pushing past the inflation of goods and services purchased.
Basically, the ESRI see Budget 2025 as hitting all the right buttons for an economy entering into a period of robust growth, citing a rapid increase in global trade as the main driving factor, with the economy so dependent on international sales.
This view is supported by the World Trade Organization’s latest report, forecasting that international trade growth rate in 2024 will be double that of 2023 and expected to continue into 2025.
The impact on Irish traders is dramatically shown in the Central Statistics Office (CSO) recent releases, showing exports of combined services and goods produced in Ireland had increased by €53bn, in the six months to June, an extraordinary 18% increase on the prior year.
The bounce back has to be seen against a particularly weak 2023, where post-covid demand for many goods fell globally. Pharmaceutical exports slowed down after the surge during the pandemic, and contract manufacturing and semiconductor exports also contributed to the downturn last year.
However, the ESRI warned that Ireland is operating close to capacity. In particular the labour market, with an unemployment rate of 4.3%, is effectively at full employment.
Overall employment now stands at 2.7m, which is a remarkable growth since 1995, when we had 1.3m people at work.
Despite the full employment, the European Commission reported in May that employment growth in Ireland is set to continue over the next two years.
Hence, employers can expect an acceleration in wage growth for some years to come.
The biggest concern expressed by the ESRI was that of capital investment levels committed to in the budget.
While agreeing with much of the capital allocation for housing, transport infrastructure, and measures to address climate change, the ESRI indicated that the investment level is still below what it was in the Celtic Tiger years.
The Draghi report for the European Commission is seen by the ESRI as a clear indicator of the need for ever-growing capital investment by members of the EU if Europe is to stay competitive with the US and China.
Queried on the likely reversal of the high income from corporation tax, the ESRI was clear that it did not expect a cliff-edge fall off, as the OECD-brokered global agreement on a 15% minimum corporation tax, which will kick in next year, will help bolster State coffers and enable fairly aggressive future capital investment by the State.
The bigger worry is ensuring value for money from an increasing pool of funds for investment.
Hopefully, lessons learned from the children’s hospital fiasco can ensure the State manages future major projects satisfactorily.
There has been a fall in private-sector capital investment since the Celtic Tiger years, according to ESRI.
Now they see the sector in need of support, which was not able to get sufficient returns following rapid interest-rate growth in recent years.
With the monetary cycle having turned, and with the prospect of further interest-rate cuts ahead, there are signs that core institutional money may finally be starting to mobilise, and it is notable that foreign investors with significant knowledge of the Irish market have been active again in the second quarter of 2024.
Historically, the US has provided the majority of private-sector capital investment.
However, two things have dampened the scale of US involvement in recent years.
Firstly, the US inflows have been significantly offset by €5.7bn of divestment as the first wave of early movers after the global financial crisis have taken their profits and sold out.
Secondly, many of the remaining US buyers are core investors who are seeking prime assets.
At elevated interest rates, the pricing of these assets has not adjusted sufficiently to unlock the flow of US core capital.
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