Ireland: Risk Assessment
Country Risk Rating
Business Climate Rating
- Flexible labor and goods markets
- Favorable business climate, attractive tax regime
- Presence of multinationals, in particular from the USA, providing a quarter of jobs, 15% of wages and 60% of non-finance market activity
- Presence (through multinationals) in high added value sectors (including pharmaceuticals, computing, medical equipment)
- Level of dependence on multinationals in terms of GDP, jobs and foreign trade: offshore activities, mainly in the form of contracted out foreign fabrication, account for ¼ of GDP
- Dependence on the economic situation and tax regimes in the USA and Europe, in particular the United Kingdom
- Vulnerability to changes in the strategies of foreign companies
- Continuing high levels of public and private debt
- Banking sector remains vulnerable to shocks
- Uncertainties on Brexit terms and future relations with the United Kingdom, specifically Northern Ireland
Consolidation of Growth in 2018
Irish economic activity is expected to remain dynamic in 2018, despite a slight slowing. The purely domestic market should gradually pick up the slack from the activity of the multinational firms that have domiciled some of their operations in Ireland in order to benefit from low corporate tax rates (maximum of 12.5%). Growth could, however, suffer as a result of the uncertainties arising from the United Kingdom’s exit from the European Union. Domestic demand will remain the main driving force for the economy.
Household consumption, which grew at a slower rate than had been expected in 2017, will be bolstered by wage growth and increasing employment. Inflation, which was up slightly in 2017, continues to be kept low by falling prices for goods imported from the UK. This will rise gradually through 2018, driven by rising housing prices and the increase in the cost of labor. Investment, which made a significant contribution to activity in 2017, will continue to benefit from the solid health of the construction sector. The catch-up effect that began in 2016 will continue into 2018, with the rise in disposable household incomes helping to consolidate the demand for housing. Following weak growth in 2017, manufacturing investment is expected to stand still, while R&D investment will remain dependent on activity levels of multinational companies. The high levels of company indebtedness and non-performing loans still on the banks’ balance sheets (15% of their portfolio, concentrated in mortgages and loans to the SME sector) will continue to impact on credit, for SMEs in particular. In terms of supply, the weak performances in the manufacturing sector will continue to be offset by the strength of activity in the services sector – most notably information technology and communications.
Near Budgetary Equilibrium and Current Account Surplus
In 2017, the boost to service exports was largely counterbalanced by the slowdown in goods exports. The first impact of Brexit on the external accounts was in the form of an increase in imports under the combined impetus of strong domestic demand and the depreciation of the British pound. The current account surplus recorded in 2017 is expected to continue in 2018, but recent movements in exchange rates are likely to affect the competitiveness of Irish goods exports. However, the slowing in shipments to the United Kingdom will be made up for by higher levels of demand from its other trading partners, such as the European Union and the United States where demand remains strong.
The contraction in the public deficit is expected to continue in 2018 despite the expansionist budgetary policy. The favorable economic situation which will help boost budget revenues and the raising of certain taxes (commercial properties and sugar) will offset the slight reduction in income taxes and higher public spending. This increased spending will be focused on education and housing, with a specific allocation of EUR 1.83 Bn for the construction of social housing. The structural surplus will drop to 0.5% of GDP in 2018, in line with European recommendations. The public debt will continue to shrink but will remain large.
At the Heart of Brexit Negotiations
Following the long awaited resignation of Enda Kenny, the leader of Fine Gael, on the 17th May 2017, the Minister for Social Protection, Leo Varadkar, was elected to take over as leader of the party and as Prime Minister. His minority coalition government remains precarious. It includes members of his party and Independents. It relies essentially on an agreement with the second-largest party in Parliament, Fianna Fail, which has agreed to abstain on votes until the end of 2018. In December 2017, a scandal involving Deputy Prime Minister Frances Fitzgerald almost brought down the coalition. It survived with Ms. Fitzgerald’s resignation, thereby avoiding the collapse of the government and fresh elections just as the Brexit negotiations are taking place. Early elections (normally due to be held in 2021) cannot be ruled out in 2018, but would probably again result in a fragmented parliament.
The border with Northern Ireland, one of the two land borders between the EU and the UK, has become a critical element in the Brexit negotiations and has highlighted the tensions between the UK, the EU and Ireland. If the United Kingdom left the common market and the customs’ union, this would imply the reinstatement of border controls. Beyond the economic implications of such an eventuality, with more than 30% of exports from Northern Ireland going to Ireland and 30,000 people crossing the border every day, the Irish question potentially imperils the 1998 peace agreement that brought to an end 30 years of civil war. Supported by the EU, Dublin rejects the reinstatement of a hard border and wants a special status that allows Northern Ireland to remain in the customs union. This puts the United Kingdom in a difficult position. Whilst the Northern Irish Republicans would seem to favor Dublin’s proposed solution, the Unionists (DUP) upon whom the government of Theresa May is dependent, are firmly opposed.