The latest quarterly report from the Economic and Social Research Institute (ESRI) neatly sums up the difficulty in forecasting the outlook for the Irish economy in 2025. In summary, the trends are generally favourable with strong employment and rising real incomes. There are dangers, too, notably from the trade and tax policies of US president-elect Donald Trump, though what shape these will take and the impact on Ireland remain unclear.
Against this backdrop, the ESRI forecasts that the domestic economy – as measured by modified domestic demand – will expand by over 4 per cent next year. After taking a hit during the cost-of living crisis, household incomes are now increasing faster than inflation and this is due to continue next year, leading to healthy consumer spending. Lower interest rates should help investment, including in housing, and multinational export trends have been strong in recent months.
It is in this latter area, however, where the uncertainties lie. It is impossible to calibrate the potential impact on the economy with any accuracy of changes in US policy, but the ESRI correctly points to the risks to exports and foreign direct investment, particularly if there is a trade war between the EU and the US. If these hit the public finances more quickly than expected, it warns, the Government may have to amend its spending plans for the years ahead.
It would be wise if this possibility was explicitly dealt with in the talks on the next programme for government, identifying where the priorities lie if there is less cash available.The report points to Ireland’s increased reliance on multinationals over the past decade and there is a significant vulnerability here.
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The next administration, however, must not get caught in the headlights when looking at the risks ahead. There is important work to get on with and, as the ESRI points out, the commitment to invest more under the National Development Programme in the years ahead is important. This goal needs to be protected, even if the public finances do come under pressure.
Illustrating the complexity of the outlook, the Irish economy is also facing problems of overheating evident in the jobs market in particular, and also in housing. ESRI researchers estimate that house prices may be overvalued by up to 10 per cent and this leaves some borrowers exposed if the economy turns down, and particularly if the jobs market takes a hit. Continued upward pressure on house prices is also leaving more and more people unable to afford to enter the market.
It all presents a complex agenda for the next government. If it is lucky, tax revenues will remain strong, allowing for State investment to continue on an upward trend. But delivering on this investment and preparing for the risks if revenue growth tails off are both vital tasks.
