Ireland channels Celtic Tiger to shake off crisis

Ireland’s economy has weathered the downturn from the Covid-19 pandemic relatively well. Its export-oriented growth model, built around a supportive tax environment and the presence of multinational corporations, has cushioned much of the blow. As a result, the country is likely to emerge from the crisis in better shape than many advanced-economy peers.

Challenges remain, however. Multiple national lockdowns to restrict the spread of the virus and Brexit-related uncertainties left their mark on the economic landscape during 2020. Gross domestic product (GDP) growth is expected to cool over the period, while consumer spending has also been hit hard. 

“Ireland is in its third lockdown. But apart from Taiwan, it will be the only advanced country to have grown in 2020. We have the economy growing by just over 2%, but it’s all being driven by net trade,” says Martin Beck, lead UK economist at Oxford Economics. “If you look at consumer spending, which best approximates living standards, that is still very weak. So we have that falling almost 11% this year because of the lockdowns and restrictions on social consumption. So the GDP number gives a very false impression of how the economy feels to the average Irish person,” he adds.

Multinational presence

Ireland’s successful export-driven growth model has attracted the presence of large multinational corporations, particularly in the technology sector. Their outsized footprint means that, when onshoring intellectual property assets through their Irish subsidiary — often for tax purposes — it shows up in Ireland’s national accounts. This can significantly distort the country’s annual GDP data.

As a result, the Irish authorities have developed alternative indicators of domestic demand, such as underlying domestic demand, that diminish this influence to offer a more accurate picture of the national economy. The Central Bank of Ireland, for instance, expects underlying domestic demand to contract by 7.1% for 2020. 

Nevertheless, distortions of this kind do not detract from the strength of Ireland’s economic story since the last financial crisis. Research from rating agency Moody’s, which gives Ireland an overall sovereign rating of ‘A2 stable’, indicates that average real GDP growth between 2015 and 2024 is expected to hit 5.7%. “The credit profile of Ireland is supported by the country’s economic strength assessed as A3, which balances the country’s high levels of wealth and competitiveness against its comparatively small size and high growth volatility,” says Sarah Carlson, senior vice-president at Moody’s. 

Years of turbocharged GDP growth since the global financial crisis, coupled with the sound management of public finances, have put Ireland in a good position to resume its trajectory of economic outperformance. “The remarkable growth figures that Ireland has enjoyed in recent years — not just in terms of GDP but also in terms of modified domestic demand — has actually been much stronger than that of other comparable European economies,” says Bert Colijn, a senior economist at ING. 

Diverse sectors

One of Ireland’s key economic strengths is the diversity of the multinationals based in the country, which has in turn stimulated agglomeration effects across the wider economy. Although big tech groups are a standout presence, pharmaceutical companies and the business services enterprises also have a sizeable footprint.

“The diversified nature of the Irish economy was visible even before the last crisis. Outside of the problems in the housing market, there was already a thriving and healthy part of the Celtic Tiger. These strong foundations helped Ireland to recover quite quickly, and positioned it well to endure the challenges linked to the Covid-19 pandemic,” says Mr Colijn. 

The presence of multinationals has been nurtured by Ireland’s low tax regime (the corporate tax rate is just 12.5%) and accompanying pro-business operating environment, characterised by a common law legal system and an ease-of-doing-business ranking that surpasses most euro-area peers. But this successful economic model today faces several headwinds. For one, global efforts to reform corporation tax could erode any advantage that Ireland currently enjoys. In October 2020, the Organisation for Economic Co-operation and Development drafted a technical blueprint that, if implemented, would ensure multinationals pay tax where they operate, rather than shifting their business through more tax-friendly jurisdictions. 

Bert Colijn, ING

Yet, even if global tax reform is on the horizon, Ireland’s other advantages may balance out any change. “Ireland remains very well positioned to be an attractive place for large multinationals to go to. Beyond the country’s attractive tax environment, the agglomeration effects that Dublin can offer will remain compelling,” says Mr Colijn.  

Calculating Brexit effect

Beyond this, however, the Irish economy is also contending with the impact of the UK’s decision to leave the EU. Here, the obvious difficulties associated with the imposition of a customs border on the island of Ireland has been a source of ongoing tensions between Dublin, London and Brussels.

Although the UK only accounts for about 10% of total Irish exports, the figures are much higher in some sectors including food and drink — a business segment that is dominated by indigenous Irish businesses. Nevertheless, in February 2021 it was still too early to determine the impact of the negotiated Brexit agreement on the Irish economy. 

“We’re still waiting for the first real, tangible trade figures to come in for January. Even so, they are likely to be distorted by the stockpiling that has been done by most businesses. As a result, for the first few months it will still be very difficult to get a good sense of Brexit’s impact on Ireland-UK trade,” says Mr Colijn. 

What is clear, however, is that the deal avoids the feared worst-case outcome of a UK exit based on World Trade Organisation rules. As Ireland’s National Treasury Management Agency notes, the negotiated deal will be a net negative for Ireland, but the negative shocks will be smaller and spread over a longer time period. It also comes with some upsides, including the possibility of increased foreign direct investment as service suppliers in the UK look to establish a presence in the EU through Ireland. 

Strong fundamentals

As Ireland contends with a post-Brexit and Covid-managed future, it is doing so from a position of strength. The good stewardship of the country’s public finances in the years since the financial crisis has pushed Ireland’s debt-to-GDP ratio and fiscal balance in an encouraging direction, particularly when compared to market peers of a similar size elsewhere in the eurozone. Ireland’s debt-to-GDP ratio fell from 120% in 2013 to 57% in 2019. Meanwhile, fiscal consolidation efforts saw the Irish government achieve a balanced budget in 2018, marking an impressive improvement from the 11.4% deficit experienced in 2009. 

Although the impact of the pandemic has hit the government’s finances, Ireland nevertheless remains well positioned internationally. “Ireland is not facing the kind of deficits that the UK or the US are experiencing. We are forecasting a deficit of about 5% of GDP for the financial year 2020/2021, whereas that figure is 20% for the UK,” says Mr Beck. 

As a result of these efforts, Ireland can rightly face the coming years with a sense of optimism. The country boasts one of the most business friendly economies in the EU, and is the bloc’s only English-speaking market. These advantages, and others, should help it to survive any potential changes linked to global tax reform initiatives.

Meanwhile, as the worst effects of the pandemic subside, the €11bn in household savings accumulated over the course of 2020 should also stimulate a rapid increase in consumer spending. If Ireland can continue to play to its strengths, the coming years may offer a continuation of the country’s recent history of economic outperformance.