Service exports driving Irish GDP, offering cushion against Trade turbulence.

Having contracted by 5.5% in 2023 the Irish economy recovered last year, with GDP rising by 1.2%, boosted by strong exports. The second half of the year was particularly robust, including 3.6% growth in the final quarter, leaving the annual change in q4 at 9.2%, so providing a strong carry-over into the current year, fortunately so , as it carries the prospect of Trumpian uncertainty and international trade turbulence.

Exports grew by 11.7% in 2024, with a notable pickup in Pharma in the final months of the year,accompanied by a substantial run-down of stocks, no doubt related to the prospect of US tariffs . However, what is striking of late about Irish trade is that service exports now dominate, notably business and computer services, amounting to €480bn last year against €329bn in goods , or 58% of total exports. Moreover, despite the strong late rise in Pharma, service exports grew by over 15% against a 7% rise in goods exports.Total exports also ended the year with annual growth of 18% so even if Pharma output is hit we still expect total export growth of 8% this year, with service exports providing some cushion against any negative impact from international trade in goods.

Capital formation fell by 25% last year, largely due to a big fall in Intangibles, although building and construction also declined, with residential contruction down by 7.5%. We expect some modest growth in the latter this year but a further fall in Intangibles contributing to a 9% contraction in capital formation.

Retail sales were notably weak last year, rising by just 0.5% and only 0.1% ex cars, so consumer spending shifted towards services. Nonetheless , personal consumption grew by only 2.3%, despite a strong rise (over 7%) in disposable income and a big decline in the CPI inflation rate, to 2.1%. Households continued to add to their already large stock of liquid assets held in bank deposits. The heightened degree of economic uncertainty may well continue to dampen consumer spending and we forecast a 2% rise this year with a 2.5% increase in modified domestic demand, marginally weaker than the 2.7% rise recorded last year.

The strong carryover of GDP into 2025 means that even if growth was zero in all four quarters the average rise in GDP would still be strongly positive, at 4.5%. US tariffs have been announced on Steel and Aluminium from the EU but not as yet on a broader range of products so it is still unclear how that will unfold but clearly has the propensity to not only hit Irish trade in goods but also dampen business and consumer confidence in general. However, as noted, the strength of service exports may offer a cushion to some degree and we expect Irish GDP to grow by 5% this year.

Irish Housing market update January 2025

The widely accepted narrative about the Irish housing market is that it suffers from a chronic lack of supply, which in the absence of a major demand shock (such as a big hit to employment),results in upward pressure on prices. That certainly seemed to play out in 2024, although prices rose more than generally expected, and by more than forecast in our price model, while the supply of new homes actually fell on the previous year , an outturn significantly at variance with official projections.

Private sector residential rents also continued to rise , increasing by 5% on the CSO data (which captures rents actually paid as opposed to asking rents on new lets). However, this represented a slowing in momentum from the 8% recorded in 2023, and more in line with our rent model. Employment growth in 2024, although strong, was actually slower than the previous year, which acts to dampen demand, and was skewed away from the higher paid multinational jobs and towards lower paid indigenous firms. The fiscal support given to potential FTB’s also plays a part, diverting rental demand, with rent controls also impacting ( maximum annual change set at 2% or annual HICP inflation, whichever is the lower,applicable in large parts of the market).

On the CSO’s index national residential prices picked up momentum in the final months of 2023 and accelerated strongly over the following summer, with the annual change reaching 10.1% in August. Since then momentum has slowed somewhat, with the annual change easing to 9.4% in November, although prices still rose 2.3% over three months, so there is no evidence there of a sharp slowdown.

Dublin prices also accelerated strongly from late 2023 after falling modestly over the previous few months, with some pointing to more increased remote working dampening demand for houses in the Capital. That proved less convincing as Dublin prices rose sharply in 2024, with the annual change in the county peaking at 10.9% over the summer and reaching over 12% for houses in the City. By November, momentum had eased a little, with price inflation in the City at 11.7% and 9.6% in the county.Price inflation excluding Dublin has also eased modestly, to 9.2% in November from a peak of 9.5%.

On the CSO index national prices are now 16% above the pre-crash high recorded in April 2007 and have risen by 160% from the post-crash low in 2013.

Household income growth is a key determinant of housing and mortgage demand and in 2024 disposable income probably grew by around 7%, judging by the data over the first three quarters of the year. This was boosted by another very strong increase in employment, which picked up strongly through the year, rising by an annual 99,000 or 3.7% in the third quarter. Consumer price inflation slowed appreciably, averaging 2.1% last year from 6.4% in 2023 so supporting real income growth.

Government policies are also geared to supporting demand, although it seems obvious that is not an issue, and that support focuses on FTB’s , with the impact very clear from mortgage lending; FTB drawdowns for house purchase rose to over 26,000 in 2024 , to a record 73% of all purchase mortgages, crowding out and offsetting a fall in drawdowns for movers. Total loans for house purchase in 2024 rose marginally to over 36,000, with the average new mortgage rising by 6% to €308,000 so giving a total loan purchase drawdown of €11.1bn, 6.3% above the previous year. Total lending, including top-ups and switchers, amounted to €12.6bn , 4% up on 2023.

Mortgage rates were higher on average in 2024 , so dampening price inflation in our model, but in truth the pass-through from the ECB rate tightening was modest, at 1.7% at the high, reflecting the huge level of excess deposits in the Irish banking system,allowing those lenders to absorb higher market rates, which hit the supply of credit from non-bank lenders. Rates are falling now and that is likely to continue given the prospect of further ECB rte cuts, an expectation evident in the increase in the number of borrowers opting for floating rates, which has risen to 30% of total loans.

Much political and media attention is given to the various initiatives the Government has announced to boost public sector housing supply and spending is now substantial ; €6bn capital investment in housing was announced for 2025, made up of €3.1bn exchequer funding, €1.25 allocated to the Land Development Agency and €1.6bn for the Housing Finance Agency . The private sector builds and funds the majority of housing, nonetheless, and that supply will be determined by the cost and availability of funding and the expected profit on any Development. Consequently expectations on future price and government policy on housing is important, with the existing rent controls and political and social hostility to foreign capital for housing acting as a major dampener on private sector supply. Foreign non-bank capital was a big factor in the pick up in completions in 2022 and 2023, with the latter exceeding 30,000 for the first time, with expectations of a 2024 figure of some 35,000 , with 40,000 seen by some in Government. In the event completions proved disappointing as the year unfolded , prompting the Government to announce a temporary waiver on Development levies and a rebate on Water levies.This resulted in a surge of commencements in 2024, to over 60,000, but not in actual completions, which emerged at 30,300, some 2,500 lower than the 2023 outturn.

This is not only well below the generally accepted annual housing figure required (50,000 is the latest Government target) but also means that the housing stock per head is still falling, such has been the growth in the Irish population, and this metric plays a key role in our price model, acting to constrain price increases when the stock is rising but adding to the upward pressure on prices when falling, as it has been for the past fifteen years.Official expectations about a steady rise in supply over the coming years appears to be based on a structural shift in housebuilding, while the evidence shows the housing market to be cyclical. These projections also have no regard for the trend in residential prices or expectations on price and demand, which would be of course a key factor in any decision on housebuilding from the private sector. Little attention is also given in these projections to the availability of labour as Ireland is at full employment.

Commencements are a reasonable lead indicator of completions in normal circumstances but the distortion last year makes that it less useful in the short term, although implying higher completions over the next few years. On the negative side, planning applications have been trending down, running at an annual rate of under 37,000, but that is less useful as a shorter term indicator of actual supply. On balance we expect perhaps 35,000 completions this year , which may translate into a stabilisation in the housing stock per head.

On the demand side mortgage rates are likely to be lower but in truth it is the availability of housing and not the cost of a mortgage which is the main issue for borrowers, as only those on relatively high incomes can access a loan. The relaxation of mortgage controls , with a LTI limit of 4 rather than 3.5 for FTB’s has also had a big impact, as has the Help to Buy scheme, which is no doubt a factor in price inflation emerging higher than our fundamental model forecast.

The main risk for housing and mortgage demand in 2025 is on the employment side, and to expectations, if a significant trade war develops between the EU and the US stemming from higher tariffs. A modest tariff rise on Irish exports might have a limited impact but it is clearly very uncertain as to what may emerge. Trump has also talked about a lower tax rate on US profits, at 20% from 21%, and 15% for on profits from goods made in the US, but that excludes Corporate tax levied by the various States and would have to be passed by Congress. It is also unclear why that might prompt a significant change in the business model pursued by the US multinationals currently in Ireland.

For the moment we are assuming no major hit to the Irish economy and to employment, which alongside our assumption of higher completions leads to an increase in mortgage loans for house purchase, with a forecast of over 40,000 drawdowns, with a value of €13.4bn.

In terms of prices, the assumption of lower mortgage rates and limited impact from supply leads to another year of steady price gains. Employment growth is likely to slow ,however, as it is constrained by the available labour force, which may increase at a slower pace given the already high participation rate.As a result we expect a 7% outturn for the year on the national index. Uncertainty about the prospects of a global downturn in economic activity, even if not materialising, may dampen expectations ,which would act as a constraining factor on mortgage lending, prices and actual supply.On rents, we expect a 4% national increase in 2024, with slower employment growth impacting demand, while low inflation will kick in in terms of rent control.

Irish GDP returns to annual growth although consumer spending surprisingly weak

The initial 2% estimate for Irish GDP growth in the third quarter was revised up to 3.5%, with the second quarter figure also revised higher. As a result the annual change in GDP was 2.9%, the first positive figure since the final quarter of 2022. It is also now likely that the average growth rate in 2024 will be marginally positive following a 5.5% contraction last year.

The quarterly growth figure was driven by a big rebound in capital formation, in turn due to a recovery in spending on R&D by the multinational sector, recorded as Intangibles. Construction spending also rose, by 4.5%, which supported modified capital formation growth of 5.2%. Modified domestic demand also rose in the quarter, by 1.3%, and looks on course for average growth in 2024 of 3%.

Service exports had been growing very strongly this year , driven by computer and business services, but the latter fell sharply in q3 and overall service exports fell 14% in the quarter, perhaps highlighting the company specific driver of quarterly volatility in external trade and capita formation. Exports in total fell 7% in the quarter, albeit still showing annual growth in excess of 10%.

The other negative contribution to growth in q3 was personal consumption. The fall was modest, at -0.2%, but that followed weak figures in the first half of the year (+0.3% in both quarters). Upward revisions often occur and as sit stands the weakness is surprising give the fall in inflation this year and the strong rise in employment and household incomes.

Have Irish Budgets really added €1,000 a year to Household bills?

It’s curious how comments made based on the projections of an economic model take on a life of their own and often invested with a level of certainty far removed from the caveats surrounding any model based simulation. Brexit was a good case in point, with dire warnings about the hit to the Irish economy that would unfold , and we now have a recent example, relating to the 2025 Budget and the claim that ‘by breaching its (spending ) rule,the Government is estimated to add €1,000 to the cost of a typical household’s yearly outgoings’.

That statement comes from the Irish Fiscal Advisory Council’s flash release on the 2025 Budget and is in turn based on research published by the Central Bank in their June 2024 Quarterly Bulletin . The article (‘Fiscal priorities for the short and medium term’) attempted to quantify the impact on the economy of Government spending in excess of the target 5% annual rise, using one of the Bank’s economic models, based on the assumption that the higher spending is current as opposed to capital and financed by borrowing, assumptions not mentioned again by anyone, and of course at variance with the fact the Govt is actually running a very large current budget surplus , not fully offset by a capital deficit.In other words Government spending is more than offset by Government tax and other receipts.

The simulation showed that domestic demand would be boosted and inflation 0.5% per annum higher than would have been the case over the period 2022-23. Assuming a 7.1% average rise in Government spending from 2024 to 2027 the model predicted inflation to be 0.5% higher in 2024, 0.3% in 2025, 0.2% in 2026 and less than 0.1% in 2027. So over the full period , 2022 to 2027, the model puts the cumulative impact on the price level at around 2%, which multiplied by IFAC’s assumed Household average outlay of €50,000 per annum gives the €1,000 figure.

So a model based simulation, based on higher current spending, financed by borrowing, translates into the €1,000 a year cost which is then repeated as if a fact.

Inflation versus the Price level

The ‘cost of Living crisis’ is often cited as a key factor in explaining the poor performance of incumbent governments in recent elections, most notably in the US Presidential poll. Yet the major Central Banks are now loosening monetary policy with more easing expected (the ECB deposit rate is currently priced to fall to 2% from a high of 4%) which highlights the difference between inflation rates and the price level. It seems clear that it is the latter which matters to electorates, and hence politically, while the former guides central banks and money market expectations. It is also no doubt somewhat galling for governments to shoulder the electoral blame for rising prices, the control of which they handed over to independent central banks, who face no sanction.

In Ireland’s case the annual change in the CPI for October was just 0.7% (and only 0.1% on the HICP measure), down from a peak of over 9% two years earlier, and prices are actually lower than a year ago in four of the twelve index divisions.Yet consumer prices as measured by the CPI are 21% higher than four years ago. That is an average change and while some prices have risen by a similar amount (food is up 22% and alcoholic drink 24%) other components have seen much larger increases,.

Housing and Utilities are 49% higher, driven by an 82% rise in mortgages , a 70% rise in utility prices and a 33% increase in rents. Transport costs are 25% higher, with fuel prices up 29%, but airfares have actually more than doubled in the four years (+106%) .

Surveys consistently show that consumers overestimate the current inflation rate so the general public probably perceive that the increase in the price level has been even higher than shown by the above figures. Wages have risen too of course, and are currently outstripping inflation, but over the four years average earnings have actually lagged prices, rising by 18% against the 21% CPI increase.

The spike in consumer prices has been a global phenomenon of course and most governments can point to very low unemployment rates by historical standards but it seems electorates now take the latter for granted but punish governments for the rise in their domestic price level, particularly as it was last seen forty years ago and so outside the experience of many voters..

Irish net debt ratio projected at 28% of GDP in 2025 Budget

The Irish 2025 Budget was delivered against an unusual fiscal backdrop. Unlike virtually all its euro peers the Government is running a fiscal surplus and the debt ratio is low and falling, helping to make Irish 10yr bond yields the third lowest in the Euro Area.The economy is also around full employment, prompting some concerns that an expansionary budget would be inflationary, although the current inflation rate is only 0.2%, the lowest in the EA. In addition, as a result of the recent ECJ ruling on the Apple tax case, €14.1bn is to be transferred from an escrow account to the Irish Exchequer, €8bn this year and the balance in 2025.

A feature of the Irish budgetary process is the publication of a White Paper a few days head of the Minister’s presentation, setting out pre-Budget estimates of the Exchequer position at end-2024 and a forecast for 2025. The former showed tax receipts some €13bn ahead of the original Budget 2024 projection, largely due to the €8bn from Apple and another large overshoot (€5bn ) from current Corporation tax receipts. Government current voted spending is also expected to come in some €3bn ahead of that projected, but still leaving a very large current budget surplus of €30.8bn in the White Paper, partially offset by a capital deficit of €17.5bn( which included a €4bn transfer to the Future Ireland Fund) and therefore an overall Exchequer surplus of €13.3bn.

The Government decided to spend over €2bn of this in 2024 in the form of a ‘cost of living package’, comprising a raft of social welfare supports. Consequently the Budget package on the day amounted to €10.3bn instead of the €8.3bn figure announced a few months ago.

For 2025 that package included €1.6bn in income tax and USC reductions, which generally went beyond indexing credits and bands and will reduce tax paid by 2.2% for a single worker on average earnings. Underlying tax revenue is forecast to rise by just 3% in 2025 (and fall marginally in total given the Apple tax impact)but the forecast current budget surplus is still large, at €28.6bn. The capital deficit is projected at €20.7bn (including €6bn as announced in transfers to the Future Ireland Fund and the Infrastructure fund), so leaving an Exchequer surplus of €7.9bn. The General Government balance is forecast at €9.7bn or 1.7% of GDP, down from €23.7bn (4.5% of GDP) in 2024.

The Government’s choice of how to allocate the Apple funds was interesting, in that it chose not to transfer all or part to the two Future Funds,which have restrictions on use in terms of timing, and instead plans next year to announce additional spending on various capital projects , including Water, Electricity and Transport. As a consequence the NTMA which had already overfunded this year, will have much larger cash balances and so will not need to fund to the same extent as previously thought in 2025. Ireland’s gross debt falls only modestly therefore this year, from €221bn to €217bn (41.4% of GDP) but net debt falls sharply to €166bn (32% of GDP). Next year the gross debt ratio is projected at 38% of GDP and the net figure at 28%.

Finally, the macro forecasts underlying the Budget arithmetic paint a benign picture, with the economy projected to remain around full employment against a backdrop of sub-2% inflation and real wage growth around 2.5%.

Irish GDP contracts in second quarter despite booming service exports

The Irish GDP data often surprises but the second quarter figure was unusual even by recent standards. The flash estimate,. produced in July, had projected a 1.2% quarterly rise but the national accounts revealed a 1% contraction in GDP. Yet this occurred despite a 12% quarterly increase in exports, which would normally translate into very strong GDP growth but in this case was offset by a collapse in capital formation . This component fell by 65%, driven by a massive decline in multinational investment in intangibles, largely R&D.

Spending on intangibles is notoriously volatile and may or may not rebound in the second half of the year but of more significance is the recovery in Irish exports and specifically the surge evident in service exports. These now significantly exceed merchandise exports ( €125bn versus €79bn in q2 alone) , driven by extraordinary growth in computer services (including software), which amounted to €66bn in the quarter, with annual growth of 27%. Ireland is Europe’s own silicon valley.

Construction spending fell in the quarter but another surprising feature is the limited growth seen in consumer spending, which did rise by 1.0% in the quarter but that followed zero growth in q1, leaving the annual increase at just 1.3%. Despite this and a rise in Government spending, modified domestic demand also fell in the quarter, by 0.5%, due to a contraction in adjusted capital formation.

Irish GDP ended last year down by an annual 9.1% so achieving a positive average growth figure for 2024 was a tall order, although possible given a very strong rebound in exports. That has indeed taken place (exports in q2 were up an annual 18%) but the Intangibles figure has been a big negative, with the result that GDP in q2 was still 4% down on the same period last year, following -4.7% in q1. The consensus did expect a modest positive growth figure for 2024 and this is less likely now in the absence of a huge rebound in capital formation. Modified domestic demand is also expected to increase this year and that looks on track, albeit with modest growth, with the annual rise in q2 slowing to 1.5% from 2.2% in the first quarter.

One final, again unusual, feature in the release was the Balance of Payments figure. This receives little attention now given Ireland’s euro membership but the current account surplus in Q2 alone was €35bn , equivalent to 28% of GDP.

ECB rate policy unfathomable

The market is giving a high probability to another ECB Deposit rate cut at its next meeting (12th September) , perhaps influenced by the previously announced decision to reduce the refinancing rate at that point, because there is nothing in the Central Bank’s decisions or messaging to support that view or indeed that rates will be a lot lower by this time next year.

The ECB staff forecasts project inflation oscillating around the current 2.5% over the remainder of this year before falling slowly to 2% by the final quarter of next year and then marginally below target in 2026. Given the presumed lags in monetary policy that might argue for easier policy now but given the large forecasts errors in 2021 and 2022 the Governing Council seems to have lost faith in any model based forward projections. The forecast decline in inflation is also not based on any economic weakness (growth picks up and unemployment actually falls ) but driven by a combination of higher productivity growth and a marked deceleration in wage inflation ; compensation per employee falls from 4.8% this year to 3.5% next and then 3.2%.

In the absence of any faith in forward projections the ECB states that ‘the Governing Council will continue to follow a data-dependent and meeting-by-meeting approach’ and will not pre-commit to a particular rate path. Yet a host of Council members clearly signalled well ahead of the June meeting that a rate cut was very likely , duly delivered, but inflation had surprised to the upside,wage inflation had re-accelerated in the first quarter and the Staff raised their inflation forecast, albeit modestly.The published account of that meeting revealed, not surprisingly, that some members were uneasy about what appeared to be a decision at variance with the data-dependent mantra.

Perhaps as a consequence, post meeting rhetoric from Council members generally pushed back on the idea that the Bank had embarked on an easing cycle, and today’s July policy meeting reinforced the data dependent message. However, the announcement also explicitly referred to ‘elevated’ service inflation, which has moved back above 4%, and ‘high’ domestic price pressure.

So if the inflation rate over the next few months does pan out as the ECB expects (i.e stay around 2.5%) why would they cut rates?. One argument is that the ECB itself believes that monetary policy is restrictive, with an emphasis on ‘real’ rates, which have risen given the steep fall in actual inflation. So a Deposit rate of 3.75% translates into a real rate of 1.75% if inflation does fall to target. This approach also utilises the idea of a ‘neutral’ real rate, at which policy is consistent with sustainable real GDP growth and target inflation, but that rate is not observable and estimates of where it might be vary, although most argue it is perhaps around 1% or even lower, consistent therefore with a Deposit rate of 3% or below.

That theoretical approach sits uneasily with ‘data dependence’ however, and as long as the latter remains the mantra any rate decision would appear to be dependent on the latest inflation reading, or at least the service component,although the current inflation figure is backward looking, making a nonsense of the idea that monetary policy be set to influence activity and prices 18 months or so in the future.

Why have higher rates not had a bigger impact on the Irish housing market?

The latest release of the CSO’s residential price index, for April, shows a further acceleration in annual house price inflation, to 7.9%. The index has risen by 144% from its 2013 low and is also 9.5% above the previous cycle high in 2007. The latest release is also notable in that Dublin prices (+8.3%) are now rising at a faster clip than in the rest of the country (+7.5%)for the first time in seven years.

It is the case that house prices did fall in real terms in 2023 (i.e CPI inflation outstripped the rise in residential prices) but that followed a strong real rise in 2022 and real prices are now rising again, although there isn’t much evidence supporting the view that households see things in ‘real’ terms anyway. This has also played out against a backdrop of monetary tightening, which saw ECB policy rates rise by 450 basis points, albeit from historically low and negative levels.The tightening cycle was also unusually rapid , starting in July 2022 and ending 14 months later, so the impact on the Irish housing market has been limited, at least to date, and the ECB has now begun an easing cycle, following a quarter point rate cut in early June.

One factor at work has been the limited pass through from ECB rates to mortgage rates; the average new loan for house purchase in April was 4.24%, or 1.61% higher than in July 2022, the onset of the tightening cycle.This in turn reflects a combination of massive excess savings held by Irish households and the competition landscape in the banking sector. The three remaining domestic banks had seen a slippage in mortgage market share to non-bank lenders in the period of very low market rates and so sought to regain share as market rates rose by using the cushion afforded by the scale of excess deposits largely held in current accounts; in April households deposits in the Irish headquartered banks amounted to €154bn and total deposits in the banks exceeded their loan books by €75bn. In that environment the banks had little incentive to raise deposit rates and used that cheaper source of funding to regain market share from non-banks, who of course were dependent on market rates. In effect then savers subsidised borrowers and bank shareholders gained also via a significant rise in bank net interest margins and hence higher equity valuations.

Affordability did deteriorate as a result of higher mortgage rates but not to a degree that materially impacted demand for mortgages. The average FTB loan in 2023 was €285k , up from €269k the previous year, paying an average rate of 3.9% against 2.6%, but the income of the average buyer also rose , from €85k to €88k. The average term on these loans was unchanged at 29 years, meaning a monthly payment of of €1370 in 2023 against €1100 a year earlier, or 18.7% of income against 15.5% in 2022.

The number of new mortgage loans for house purchase did fall modestly in 2023, by 2% to 36k, but FTB loans rose marginally in volume terms to 25.6k. Net mortgage lending had fallen in 2022 but , surprisingly, picked up sharply through 2023 and in April this year recorded annual growth of 1.6%, with a mini lending boom evident in consumer credit, which is rising by 8.8%, in marked contrast to the picture in most other euro states.

Another factor impacting house prices was the rather odd decision by the Central Bank, in terms of timing, to effectively loosen monetary policy at the same time the ECB was tightening. This was via a change to the mortgage controls,originally introduced in 2015, with the LTI limit on FTB loans raised in 2023 from 3.5 to 4.0. The impact of that decision is clear from the data on lending, showing that 40% of FTB loans in 2023 were above an LTI of 3.5, against 13% in 2022. Government policy also plays a role here, geared as it is to supporting FTB demand via a large tax subsidy (buyers can reclaim up to €30k in income tax for a deposit) and it is notable that the average LTV for FTB loans in 2023 was virtually unchanged at 80.3%.

Most analysts had expected housing supply to fall last year but in the event completions rose to 32.6k, the highest since 2008, but this is still lagging population growth, so the housing stock per head is still falling. In our housing model the supply effect is anyway dwarfed by the impact of rising household incomes, the main driver of demand, in turn largely fuelled by changes in employment and wages, both of which have risen strongly; household disposable income rose by 10% last year on the latest CSO data, following a 7% increase in 2022. This remains the key fundamental driver of the market , rather than supply or interest rates. Employment growth is slowing,in part a reflection of the limited supply of labour, and that may dampen house price inflation to some extent, regardless of any interest rate boost . Finally, expectations can play a significant role especially in the short term, be it on interest rates or the perceived impact of government policies but are difficult to capture effectively in any model, although over time the demand fundamentals tend to reassert themselves as key.

Surge in Software exports brings five quarter fall in GDP to an end

The Irish economy grew by 0.9% in the first quarter of the year according to the CSO’s initial estimate , which followed five consecutive quarterly contractions. That decline reflected large falls in multinational manufactured exports and the recovery was also sparked by the multinational sector, albeit from service exports and such was the scale of the increase that it now looks more likely that the annual GDP figure for 2024 may show modest growth , having looked more like zero or even a further contraction such was the scale of the negative carryover from last year.

Exports in total grew by a 7.3% in volume terms in the quarter, driven by an 11% rise in services which dwarfed a 2% increase in goods. This still left the latter 17% down on the previous year, and although merchandise exports made in Ireland (dominated by organic chemicals and Pharma) were €2bn higher than a year earlier, goods processed abroad are still falling, down €14bn on the year. Service exports, in contrast, rose by an annual €20bn, to €103bn in the quarter, including an €11bn rise in computer services, largely software, and a €5bn rise in business services. It may well be that the AI impact on the sales of the likes of Meta, Google and Microsoft could have a more significant and persistent impact on Irish exports into the future.

Household disposable income in Ireland grew by an annual 10% in q1, supported by further employment growth, but the savings ratio is rising again (up to 14.7% in q1) and so consumer spending growth has been modest, at 0.6% in real terms in q1 following no growth in the previous quarter and is only 1.7% higher than a year ago. Construction spending fell sharply in the quarter, dampened by weaker housebuilding and a sharper decline in non-residential construction. Spending by Irish firms on machinery and equipment did rebound , however, so modified capital formation grew by 7% and as a result modified domestic demand also rose, by 1.4%. Overall capital formation fell though, , by a huge 40%, reflecting big declines in multinational spending on machinery and equipment and intangible assets, which also impacted imports, which fell by 6%.

As noted, the economy entered the year with a huge negative carryover effect from 2023 (GDP in q4 was down 8.7%) and the growth rebound in q1 this year still left the annual change at -6.5%. However the first quarter export performance does make it more likely that annual GDP in 2024 may well be modestly positive, at around 1.5%. The quarterly profile also means that 2024 could end the year with a strong annual carryover into 2025.