The Government may need to revise its spending plans for 2025 and beyond if the incoming US administration aggressively targets the Irish-based pharma sector, the Economic and Social Research Institute (ESRI) has warned.
In its latest bulletin the institute highlights a number of international headwinds that could knock Ireland’s economy off course, not least a more protectionist stance in Washington.
US president-elect Donald Trump has promised to impose blanket tariffs on all US imports to improve the US trade balance and boost domestic manufacturing.
Ireland’s exposure to such a protectionist pivot by the world’s largest economy is significant with the State exporting €54 billion of goods into the US every year, two-thirds of which are pharmaceutical products, the overwhelming majority which are produced by US multinationals.
“The prospect of a global trade war, given the Trump administration’s proposals on tariffs, the impact of taxation policy on intellectual property location, allied to the possible targeting of the pharmaceutical sector based in Ireland, could have particular implications for both activity levels in the domestic economy and for the exchequer receipts,” the ESRI said.
“If these impacts materialise more quickly than expected, particularly those on the public finances, some aspects of planned future expenditure levels outlined in Budget 2025 may have to be revised in the new year,” it warned.
In its latest commentary the ESRI noted that while the economy as measured in traditional GDP (gross domestic product) terms would shrink this year, the domestic economy would “register strong growth”.
It said it expected modified domestic demand, a more tailored measure of domestic activity, to increase by 3.2 per cent in 2024 before growing to 4.1 per cent in 2025 driven “by increases in real incomes, strong labour demand and higher housing investment in 2025″.
With inflation trending downwards at a faster pace than previously expected and wages growing by 4-5 per cent in nominal terms, consumers could expect to enjoy a period of real wage catch-up after a significant period of falling living standards driven by the recent energy price shock. Real wages are expected to grow by 2-3 per cent this year and next, it said.
It noted that while falling energy prices were exerting downward pressure on the rate of inflation, the restaurants and hotels sector remains the largest contributor to Irish inflation. The think tank said GDP would rebound next year (growing by 4.5 per cent) driven by resurgence in multinational exports.
“Ireland’s economy continues to display considerable differences in volatility between the multinational-dominated sectors and the domestic activity,” it said. “With a low unemployment rate, quicker than expected disinflation throughout 2024 and high savings rates, households continue to increase spending in a robust fashion,” the institute said.
It said after a weak 2023 the multinational sector is showing signs of recovery.
“However, there are considerable downside risks focused on policy changes by the incoming Trump presidency which could notably impact trade, FDI (foreign direct investment) and the public finances,” said the ESRI’s Conor O’Toole.
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