In August Irish households paid 57% more for Electricity according to the CPI than in early 2021. Unfortunately the Government appears reluctant to spell out clearly how prices are determined, perhaps because they can do little about it in the short term.
Wholesale prices are set to meet demand in the EU and so it is the price of the last unit supplied which determines price- a marginal cost model, Consequently the lower price of wind energy or nuclear power has no impact , with natural gas, LNG and oil the key. Blaming profiteering by say gas or oil companies is pointless as the model chosen is deemed necessary to meet demand on a real time basis. In Ireland’s case our domestic production of natural gas is falling steadily and gas imports have risen sharply, while we do not import LNG. So the price of natural gas is key and although the EU imports more from Norway and LNG from the US it is still dependent on Russia for over 20% of energy needs, albeit well down since the Ukraine invasion.
Following the spike in prices that followed, the EU brought in a short term emergency rule, allowing Governments to tax profits of lower cost producers to fund consumer subsidies but that has past. So whether renewables are 50% of electricity supply or 75% the price of gas is still what matters and unlikely to fall, absent a global downturn. Higher renewable usage may be positive for other reasons but it won’t affect price.
Category: Uncategorized
2026 Irish Budget
The 2026 Budget is predicated on a slowdown in the economy; GDP growth is projected at 1.0% from a massively revised 10.8% this year, with employment growth slowing to 1.5% from 2.2% and consumer spending rising by 2.3% from 2.9%. Inflation is forecast to remain benign , at 1.9%.
The Government is finally acknowledging that the rise in the Corporation tax rate to 15% will boost revenue, by a forecast €3bn, bringing total Corporation tax receipts to €34bn or 31% of total tax revenue. Total current revenue rises by just €1bn while net current spending increases by €7.5bn,with voted spending up by 9%. As a result the current budget surplus falls to €22.7bn from €29.2bn this year. Tax bands and credits are unchanged so with wage growth there will be a net increase in the real tax burden for many, but at this stage of the electoral cycle the Government has chosen spending rather than tax reductions.
This year also saw a big increase in capital spending, to €25bn, including €5.5bn additional spending as part of the National Development plan. No such commitment is included for 2026, so capital spending actually slows to €20bn. The Government also plans to add €2bn to the Infrastructure Fund and €4.5bn to the Future Ireland Fund , with the overall capital deficit projected at €24.6bn, so leading to a small Exchequer deficit of €1.8bn.
The Funds transfer is netted out in the General Government figures which also includes a surplus on the Social Insurance Fund, so the General Government balance remains in surplus, at €5.1bn, albeit half the expected figure for 2025. Total gross debt is forecast to be largely unchanged in 2026, at €211bn, which alongside the modest rise in GDP results in a further fall in the debt ratio, to 32.3%
Market for Pharma implies limited US tariff impact
I have noted elsewhere that its best to ignore macro-model simulations about the impact of tariffs when the exports are dominated by one sector, as is the case in Ireland; Chemicals and related products (call it Pharma) amounted to 75% of Irish merchandise exports in the year to May, with some two-thirds of Pharma going to the US. Better then to concentrate on the market conditions for that sector.
A key factor is how demand is affected by a change in price and studies in the US show a very limited response ; price elasticity is very low, at around -0.15%, So a 10% rise in price would reduce demand by only 1.5%, implying that if all of the 15% proposed tariff on EU goods was imposed demand would fall by just 2.25%.
A second issue is whether sellers will absorb some of the tariff in lower profits, in turn impacted by profit margins, which in the case of Pharma are huge, often at 40% or more . So Pharma companies, if they choose, may not pass on all the tariff to the consumer.
Finally, Irish Pharma exports now include weight loss drugs, the demand for which is soaring, which is a further argument supporting the view that the tariff impact on exports (leaving aside that on sentiment) has been exaggerated.
Ireland’s MAGA growth.
The threat of US tariffs has affected GDP both in the US and abroad this year, boosting imports in the former and exports elsewhere, as firms scrambled to front-run any levies. Pharma was particularly impacted, and that became clear from Ireland’s monthly trade data, showing an extraordinary surge in Pharma exports to the US and hence total goods exports given the importance of that sector in Irish international trade.
A very strong first quarter GDP was therefore widely expected, with the initial flash growth estimate at 3.2%, but that is now put at 9.7%, with net exports rising by €67bn and contributing 6 percentage points to quarterly GDP growth. There was also a notable run-down in inventories but that was dwarfed by a very large increase in investment, reflecting strong non-residential construction and a rise in Intangibles, although the latter was also captured in service imports, so dampening the GDP impact. Consumer spending remains limp, rising by 0.6% in the quarter, despite strong growth in real incomes, implying a rising savings ratio. Modified domestic demand, a measure of underlying domestic spending, rose by 0.8%.
Real GDP in q1 was 22% up on the same period last year, with exports 23% higher including 44% for goods, which on the face of it makes the 4% consensus forecast for GDP growth in 2025 look redundant. However, Pharma exports are likely to fall back sharply in the coming months even in the absence of tariffs, so we may see some strongly negative quarters, although a positive 2025 outcome still seems realistic, with employment growth notably buoyant in recent months. It’s also worth noting that the export boost was also accompanied by a very significant increase in profit outflows, notably in the manufacturing sector, with the result that GNP, which adjusts for net international profit and interest flows, actually fell 5% on the year, although it is very volatile on a quarterly basis.
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.
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.
Dublin leading acceleration in house price inflation
Residential property prices in Ireland have picked up markedly over the past few months, supported by rising real incomes (given the fall in CPI inflation) and the expectation that ECB rates will fall this year, with the June policy meeting likely to see the first cut . More mortgage borrowers are certainly of that view, with 26% opting for floating rates in January, a significant change from the 5% or so seen over recent years.
The CSO’s house price index for January confirmed the more buoyant trend, with residential price inflation nationally accelerating to 5.4% from 4.1% in December. The national index has been supported by price gains excluding Dublin but that appears to be changing; Dublin prices were weak in 2023 and last summer were down an annual 1.8% but have picked up strongly of late, rising by 3.5% in the three months to January. Houses in Dublin City have seen the strongest recovery, up by 3.9% in three months, taking the annual increase to the past year to 6.2% from 2.8% in December. In county Dublin the annual change also accelerated strongly to 4.6% from 2.5%. The annual change in Dublin is flattered by base effects (as prices fell in January last year) and this is likely to remain a feature up to mid-year, with even modest monthly gains leading to a 9-10% annual figure.
That base effect will be less of a feature in the rest of the country, albeit still present, and prices have also picked up on a monthly basis, by 2.7% in the past three months. That has boosted annual price inflation excluding the capital to 6.2% from 5.3%. Annual property price inflation is strongest in the Mid-West (Clare, Tipp and Limerick) at 9.5%, followed by 9.3% in the Midlands ( Laois, Offaly, Longford and Westmeath)
Irish Tracker holders to get unexpected bonus from ECB
Tracker rates in Ireland became the norm in the early noughties,linked to the ECB’s refinancing rate (refi rate) with a spread, which averaged around 1.1% . Consequently the ECB’s current refi rate of 4.5% translates to a Tracker rate of 5.6%, although for years borrowers paid only 1.1% given the refi rate was at or near zero from 2014 to July 2022.
The refi rate is the rate banks pay to borrow from the ECB and used to be the main instrument used by the Bank to control short term interest rates in the euro area. However, that changed when the ECB started to flood the market with excess liquidity in an attempt to get inflation back up to the 2% target and so the Deposit Facility rate (the rate the ECB pays banks for deposits) became the effective operational rate . The spread between the refi and deposit rate has varied over time but since 2019 has been set at 50bp, with the current deposit rate at 4%.
That is set to change from mid-September according to an announcement setting out the ECB’s proposed new framework for guiding euro rates .The issue arises because excess liquidity is falling and the ECB is looking ahead and to the kind of operational framework they will adopt when liquidity is tighter. They have decided that the Deposit rate will still be the key driver of rates but as liquidity ebbs money market rates may well start to rise above that floor.Banks will be able to borrow all they need at the refi rate, so that will put a ceiling on rates but the spread between the two will fall to 15bp from the current 50bp in order to maintain a tighter corridor.So even if the deposit rate in September was still 4% the refi rate falls to 4.15% and Tracker rates decline by 35bp. Of course the market is actually priced for cuts to the Deposit rate by then, to say 3.5%, which if it materialises would mean tracker rates will fall by 85bp to 4.75%. The market is currently priced for a cycle low in the deposit rate of 2.25%, which implies a Tracker rate of 3.5%..