Ireland: Risk Assessment
Country Risk Rating
Business Climate Rating
- Flexible labour and goods markets
- Favourable business environment; attractive taxation
- Presence of multinational companies, particularly from the United States, providing a quarter of jobs, 15% of wages and 60% of non-finance market activity
- Presence through multinationals in high value added sectors, including pharmaceuticals, IT and medical equipment
- Dependent on the economic situation and tax regimes of the United States and Europe, particularly the United Kingdom
- Vulnerable to changes in the strategies of foreign companies
- Public and private debt levels still high
- Banking sector remains vulnerable to shocks
- Uncertainties on the terms of Brexit and future relations with the United Kingdom, especially Northern Ireland
Slower growth in 2019
Growth was very buoyant in 2018. The domestic economy has proven to be robust, supported by strong demand and well oriented exports, particularly in the pharmaceutical sector. The increase in household disposable income, supported by higher employment and low inflation, continued to boost housing demand. Activity is expected to decelerate in 2019, although the extent of the slowdown remains uncertain, and will depend on the outcome of Brexit negotiations between the United Kingdom and the European Union. If the proposed withdrawal agreement is approved, growth could still suffer from a decline in household and business confidence. Highly dependent on the United Kingdom (15% of Irish exports of goods and services are to the UK), exports should also be penalized. Some sectors, such as agri-food, would be particularly vulnerable, even if a customs union is formed. While a no-deal Brexit in March 2019 is unlikely, it cannot be entirely ruled out. Such a scenario would have severe consequences on the Irish economy and could result in a 7 percentage point contraction in GDP by 2030. The ratification of the exit agreement between the United Kingdom and the EU in November 2018 by the British Parliament is therefore crucial for Ireland, as it would not only maintain an open border between Ireland and Northern Ireland, but would also facilitate furthertrade.
Large current account surplus expected to continue
Public finances continue to improve. The favorable economic environment has continued to generate budgetary revenues, in particular through higher-than-expected corporate income tax revenues. The 2019 budget, based on a growth estimate of 4.2%, should allow a balanced budget to be maintained while continuing the investment policy initiated in 2018 under the national development plan. Since some of the resources included in the 2019 budget have already been committed to capital expenditure, the government will have to increase certain taxes (VAT on tourism, cigarette tax) to give itself additional room for manoeuvre. Household taxes are expected to decrease (0.5% of GDP) but by less than in 2018.
Robust export growth and low imports, linked in particular to the decline in chartering activity, saw the trade surplus swell sharply to almost 35% of GDP in 2018, comfortably offsetting the large income deficit arising from the activity of multinational firms. Ireland is expected to continue to enjoy a sizeable current account surplus in 2019. Exports will remain brisk, particularly to the United States and the EU, but are expected to continue to slow towards the United Kingdom. However, a large portion of the surplus remains linked to multinational firms (depreciation of foreign capital on the domestic market and undistributed profits of foreign companies). Stripping out these statistical distortions, the current account surplus would be equivalent to 1.3% in 2018 and 1.0% in 2019.
Brexit agreement in favor of Ireland
While Brexit negotiations seem to have tilted in favor of the Irish Republic, Ireland’s fate remains dependent on the decision of the British Parliament to ratify the November 2018 agreement. If validated, it should protect Ireland from the possible consequences of Brexit beyond the transitional period. The border between Northern Ireland and Ireland should thus remain open, respecting the 1998 Peace Treaty, and the free movement of persons would be maintained until 2020. The text also provides additional guarantees for Ireland (backstop).
Regarding domestic policy, Taoiseach (Prime Minister) Leo Varadkar’s minority government remains fragile. It essentially relies on an agreement with the second-largest force in the parliament, the Fianna Fáil Party, which agreed to abstain from a non-confidence vote in the government. Despite supportive economic conditions, the government is under increasing pressure and continues to be challenged over its management of the housing crisis. Mr. Varadkar has pledged to not call an election before the end of the Brexit crisis, but snap elections in 2019 – instead of in 2021 as scheduled – cannot be ruled out. Elections could in fact turn in Mr Varadkar’s favor, since the latest polls show that his Fine Gael Party would win a comfortable victory. With the support of independents and the Green Party, he could rebuild a majority without a prior agreement with Fianna Fáil. Last but not least, outgoing president Michael D. Higgins was re-elected by a large majority on October 26.