Irish economy update Summer 2023: Domestic growth still quite strong but global risks cloud outlook

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Quarterly Economic
Commentary – Summer 2023
DATE
June 28th 2023
AUTHORs
Kieran McQuinn, Conor,
O’Toole, Wendy Disch and
Eoin Kenny.

Domestic factors remain strong
• Historically low unemployment rate –
labour market likely operating at capacity
• Strong consumption activity
• Continued growth in taxation receipts
Multinational activity slows
• Slowdown in export activity in key sectors
• Declining investment alongside higher
interest rates
Headline inflation set to fall, core remains sticky
• Declines in energy prices will contribute
to fall in headline inflation but levels
remain high and risk of acceleration in
wages
Overview: Robust growth in domestic economy despite
moderation in multinational activity
Forecast
GDP MDD
2022 12.0 8.2
2023 0.1 3.6
2024 3.5 4.0

3
Nowcast of Modified Domestic Demand
• Stronger-than-
anticipated
consumption and
modified investment
contributed to
growth in Q1 2023.
• We expect MDD
growth to moderate
to 2.7% in Q2 2023
with overall growth
of 3.6% in 2023.
Note: Nowcast for Q2 includes data available through 14 June
NOWCAST OF MODIFIED DOMESTIC DEMAND: Q22021 – Q22023
Actual, Q1
5.6%
Nowcast, Q2
2.7%
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
2021Q2
2021Q3
2021Q4
2022Q1
2022Q2
2022Q3
2022Q4
2023Q1
2023Q2
Annual
growth
(%)
Actual Outturn Final Nowcast Current Nowcast

4
Risks facing the Irish economic outlook
International conditions
• Banking sector challenges in adapting to higher interest rate environment
may dampen investment and trade activities
• War in Ukraine and impact on food and energy markets
• China and US relationship implications on trade and heighten uncertainty
Domestic specific-risks
• Downturns in ICT or pharma carry significant risks towards domestic
economy
• Accelerated wage growth may feed into wage-based price increases and
prolong high interest rate cycle
• Unmet labour demand may escalate capacity challenges in key sectors

Investment
• Modified investment ↑ in Q1
2023 but construction is
trending downwards.
• Rising cost of financing may
lead to deferral of investment
activity, contributing to
moderation in modified and
headline investment growth.
Sources: Central Statistics Office; St. Louis Fed, Bank of England, ECB, Datastream
0
200
400
600
2021Q1
2021Q2
2021Q3
2021Q4
2022Q1
2022Q2
2022Q3
2022Q4
2023Q1
Construction Machinery & Equipment (Excl Aircraft)
Intangibles (excl R&D IP) Aircraft & R&D Intangibles
COMPONENTS OF INVESTMENT (INDEX)
0
1
2
3
4
5
6
01/04/2018
01/07/2018
01/10/2018
01/01/2019
01/04/2019
01/07/2019
01/10/2019
01/01/2020
01/04/2020
01/07/2020
01/10/2020
01/01/2021
01/04/2021
01/07/2021
01/10/2021
01/01/2022
01/04/2022
01/07/2022
01/10/2022
01/01/2023
01/04/2023
Federal Reserve Funds Rate BOE Base Rate
ECB Fixed Rate Tender
RISING INTERNATIONAL POLICY RATES
Forecast
Investment
Modified
investment
2022 25.9 19.8
2023 5.7 3.9
2024 6.1 4.5

6
Construction & housing output face
headwinds
• Covid-19, supply chain bottlenecks,
inflationary pressures and rising cost
of finance have contributed to
challenges in construction investment
• Slowdown in commencements in
2022 contributing to expected
reduction in completions in 2023
• Tight labour market is presenting
capacity constraints; upward pressure
on wages may dampen output
• House prices declining alongside
reduction in demand as rates
continue to increase
0
1000
2000
3000
4000
5000
6000
0
5
10
15
20
25
2018
January
2018
May
2018
September
2019
January
2019
May
2019
September
2020
January
2020
May
2020
September
2021
January
2021
May
2021
September
2022
January
2022
May
2022
September
2023
January
Commencements
%
Y-on-Y
Construction Materials Inflation (Y-on-Y)
Commencements
COMMENCEMENTS & MATERIALS COST
We expect housing completions to
number 27,000 in 2023, rising to
30,000 in 2024.

Consumption expectations in Ireland
• High price levels still pose
significant challenges, particularly
to low-income households.
• Yet the high savings ratio has
countered rising prices and
interest rates.
• Rising wages are also likely to
contribute to continued growth
in consumption. We expect
growth of 4.7% and 5.0% in 2023
and 2024.
Source: Central Statistics Office
Forecast
2022 2023 2024
6.6 4.7 5.0
Q1 2023:
6.7%
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
2
0
1
9
Q
1
2
0
1
9
Q
2
2
0
1
9
Q
3
2
0
1
9
Q
4
2
0
2
0
Q
1
2
0
2
0
Q
2
2
0
2
0
Q
3
2
0
2
0
Q
4
2
0
2
1
Q
1
2
0
2
1
Q
2
2
0
2
1
Q
3
2
0
2
1
Q
4
2
0
2
2
Q
1
2
0
2
2
Q
2
2
0
2
2
Q
3
2
0
2
2
Q
4
2
0
2
3
Q
1
CONSUMPTION (Y-ON-Y %, SA, CONSTANT PRICES)

Inflationary pressures remain but drivers shift
-2.0
0.0
2.0
4.0
6.0
8.0
10.0
12.0
2020M01
2020M03
2020M05
2020M07
2020M09
2020M11
2021M01
2021M03
2021M05
2021M07
2021M09
2021M11
2022M01
2022M03
2022M05
2022M07
2022M09
2022M11
2023M01
2023M03
2023M05
Y-on-Y
%
Ireland Euro area (20 countries)
-2.0
0.0
2.0
4.0
6.0
8.0
10.0
12.0
Jan-2020
Mar-2020
May-2020
Jul-2020
Sep-2020
Nov-2020
Jan-2021
Mar-2021
May-2021
Jul-2021
Sep-2021
Nov-2021
Jan-2022
Mar-2022
May-2022
Jul-2022
Sep-2022
Nov-2022
Jan-2023
Mar-2023
May-2023
Y-on-Y
%
HEADLINE INFLATION RATES DECLINING…
…YET CORE INFLATION STUBBORNLY HIGH
Forecast
2022 2023 2024
CPI 7.8 5.0 3.0
HICP 8.1 4.3 2.8
• Growth rates in HICP and CPI
have been diverging as
mortgage rate increases have
fed through to CPI
• We expect both measures of
inflation to moderate
throughout the year, yet risks
of wage-related price
increases and higher-for-
longer core inflation remain
Source: OECD

9
Energy and food prices
Price levels continue to increase
on a monthly basis; 15% and
13.1% higher y-on-y in the Euro
Area and Ireland in April
ENERGY PRICES DECLINING… …FOOD PRICES CONTINUE TO RISE
0
2
4
6
8
10
12
14
16
18
20
40
50
60
70
80
90
100
110
120
130
140
2022M01
2022M02
2022M03
2022M04
2022M05
2022M06
2022M07
2022M08
2022M09
2022M10
2022M11
2022M12
2023M01
2023M02
2023M03
2023M04
2023M05
Annual
growth
(%)
Index
Euro area (20 countries) Ireland
Euro area (20 countries) Ireland
Energy price levels begin to
decline, with prices at their
lowest level in 12 months in
Ireland as of May 2023
-10
0
10
20
30
40
50
60
40
60
80
100
120
140
160
180
200
2022M01
2022M02
2022M03
2022M04
2022M05
2022M06
2022M07
2022M08
2022M09
2022M10
2022M11
2022M12
2023M01
2023M02
2023M03
2023M04
2023M05
Annual
growth
(%)
Index
Source: OECD

10
• Box by Kakkar, Lynch and Farrell examines the relationship between wholesale
and retail electricity prices in Ireland
• Wholesale electricity prices have fallen significantly from their peak in the
summer of 2022 yet this decline has not fed into retail prices
• In Ireland, forward gas prices are the best indicator of retail electricity prices
as electricity firms hedge via the gas market.
• Several studies suggest that reductions in wholesale prices are not likely to be
passed through at the same rate as price increases and pass-through is more
likely in the long run vs short run. Magnitudes and timelines of pass-through
vary across countries.
• Retail prices should decline within six to twelve months if there is no anti-
competitive behaviour.
Trends in retail energy prices

Merchandise trade slows through start of year
-20%
-10%
0%
10%
20%
30%
40%
50%
2019
January
2019
April
2019
July
2019
October
2020
January
2020
April
2020
July
2020
October
2021
January
2021
April
2021
July
2021
October
2022
January
2022
April
2022
July
2022
October
2023
January
2023
April
Y-on-Y 12 month rolling ave. 3 month rolling ave.
MERCHANDISE TRADE SLOWS THROUGH
START OF YEAR
Commodity group
Imports Exports
Jan – April
annual
growth
Share
2022
Jan – April
annual
growth
Share
2022
Total food and live animals 12% 7% 12% 7%
Mineral fuels, lubricants and
related materials
9% 9% -34% 1%
Chemicals and related
products, n.e.s.
24% 27% -6% 64%
Manufactured goods classified
chiefly by material
-4% 7% 1% 2%
Machinery and transport
equipment
7% 37% -14% 14%
Miscellaneous manufactured
articles
6% 11% 8% 10%
Overall 11% -5%
MERCHANDISE EXPORTS DECLINE IN KEY
COMMODITY GROUPS WHILE IMPORTS INCREASE
Source: Authors’ calculations using data from Central Statistics Office

Export growth expected to moderate
• Volume of total exports in Q1 2023 ↓ 2.1% Q-
on-Q but ↑ 6.1% from Q1 2023
• Export activity dependent on key sectors:
• ICT shows resilience in Q1 with
computer services ↑ 8.3% y-on-y
• Potential contraction in pharma as
exports ↓ 5.9% y-on-y
• Exports related to internationalisation
(contract mfg, R&D, etc.) ↑ 28.4% in Q1 but
significant volatility in these goods & services
• Developments in the ICT and pharma sector
could present upside or downside risks to this
outlook
Forecast
Exports Imports
2022 15.0 19.0
2023 4.2 7.0
2024 5.1 6.5

Labour Market
• Unemployment rate at a historical low
• 3.8% in May
• Employment levels continue to increase; 2.6 mil
people employed in Q1 2023 (↑4.0% y-on-y)
Unemployment Rate
2022 4.9
2023 3.9
2024 3.7
Note: The unemployment rate through February
2022 is based on the COVID-adjusted monthly
unemployment series published by the CSO.
• Risk of capacity constraints
in key sectors (health care
and construction)
• Risk of accelerating wage
growth
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
1.8
0
5000
10000
15000
20000
25000
30000
35000
40000
2008Q1
2008Q4
2009Q3
2010Q2
2011Q1
2011Q4
2012Q3
2013Q2
2014Q1
2014Q4
2015Q3
2016Q2
2017Q1
2017Q4
2018Q3
2019Q2
2020Q1
2020Q4
2021Q3
2022Q2
2023Q1
Job vacancies (LHS) Vacancy rate (RHS)
JOB VACANCIES REMAIN HISTORICALLY HIGH
Source: CSO

14
• Employment permit applications for non-EEA nationals provide useful indication
of demand for labour in the economy
• Tight labour market conditions feed through to permit applications: applications
from 2019 to 2022 increased 89.9%
• Changes in policies have a clear effect on sectoral composition; sectors with skill
shortages (eg: Construction) have experienced increases in applications since
policy changes in 2019 & 2021
• ICT and Health care & social work account for over half of all application permits
• Permit applications in Q1 2023 continued to increase in sectors with shortages
(eg: Health care and Accommodation & food service) despite declining overall
• Declines in Q1 2023 in ICT point to subdued demand for labour in the sector
EMPLOYMENT PERMITS & DEVELOPMENTS IN
THE LABOUR MARKET

15
THE LABOUR MARKET ASPECT OF THE IRISH DUAL
ECONOMY
• Significant distinction between the performance of Irish owned vs foreign owned
enterprises
• Share of employment in foreign sectors increased from 9% (170k) of total in 2011 to
13% (310k) in 2021
25000
30000
35000
40000
45000
50000
55000
60000
65000
2000 2003 2006 2009 2012 2015 2018 2021
Domestic Foreign
ANNUAL LABOUR COMPENSATION PER WORKER (€)
Source: CSO and QEC calculations
• Faster employment growth in foreign
dominated sectors since 2015 and
significant difference in income levels
• Annual compensation per worker amongst
foreign firms 38% higher than domestic
firms in 2021
• Implications for the competitiveness of
domestic firms as they face increasing
upward pressure on wage levels in order to
maintain activity

Public Finances: strength in tax receipts
continues
• Surge in taxation revenues has continued into 2023; revenue of €33.1bn in
Jan-May (+10% from 2022)
• Concerns about the sustainability of corporation taxes; pharma and ICT
accounted for 90% of total corporation receipts in 2021
• Establishment of the National Reserve Fund allocating €6bn in 2022 and
2023 to use for future needs (pension, sovereign wealth fund or
infrastructure)
• We expect continued growth in tax receipts in 2023 and 2024 and a surplus is
expected in both years, leading to further declines in debt to output ratios.
2022 2023 2024
GGB (€bn) 8.0 9.8 15.5
% of GDP 1.6 1.9 2.9
Debt to GDP 44.7 41.2 37.2

Assessment
From 2013 – 2021, Irish economy grew 4.4% on average (Fitzgerald (2023))
• Growth of 4.1% if corporation taxes excluded
Tightened monetary policy impacting housing market
• Slowdown in house price increases reflect cooling in demand from higher
interest rates
• Housing supply continues to fall below demand particularly as estimates of need
likely to be revised upwards
• National Reserve Fund could be used in part to cover additional costs
In general, economy set to continue in resilient manner in 2023 and 2024
• Headline indicators (GDP) suggest slowdown in Q1, driven by change in net trade
(exports declining and imports rising) and slower investment
• Domestic indicators (MDD) suggest robust growth driven by labour market and
increased consumption – labour market operating at capacity

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