Domestic activity slows down due to the consequences of the war in Ukraine

After being one of the few countries in which activity did not decline in 2020, the economy recorded exceptional growth in 2021, thanks to the rebound of domestic demand following the lifting of restrictions and, above all, to the dynamism of exports by multinationals in the pharmaceutical sector (36% of goods exports in 2021, 55% including chemical products) and IT services (60% of services exports). At the beginning of 2022, the surge in the prices of many commodities (oil, gas, metals, cereals) due to the war in Ukraine led to a rise in inflation, which reached 9.6% in June 2022. Driven mainly by energy prices (heating oil +115%, gas +57%, electricity +41%), it will remain very high in the second half of the year due to the spread of inflationary pressures to all goods and services. Despite a still high savings rate (21% of gross disposable income at the end of March 2022, compared with 10% before the crisis), households’ consumption - whose confidence was at its lowest since 2011 in July - will slow down significantly in this context of loss of purchasing power and high uncertainty, encouraging precautionary savings. Businesses will not be left out, as they will face soaring production costs and supply difficulties - expressed by 50% of companies in the industry in the third quarter of 2022. Concomitantly, despite negligible trade with Russia - which accounted for only 0.3% of exports and 0.6% of imports in 2021, albeit for a quarter of imported fertilizers - the external situation will also be deteriorated, with the conflict considerably affecting activity in Europe in the second half of the year and, consequently, external demand. While the domestic economy is likely to suffer a setback, multinationals may prove far more resilient and allow the Irish economy to post (somewhat artificially) strong growth, as in the first quarter of 2022 when GDP grew by 6.3%, and GNP (excluding multinationals) fell by 3.6% compared with the fourth quarter of 2021.

While the signing of the trade agreement between the UK (13% of Irish exports of goods and services in 2019) and the EU in December 2020 was excellent news, the recurring tensions and threats that have since plagued the relationship between the two parties, particularly over the Northern Ireland Protocol, are generating uncertainty. This is all the more true given that although the country does not import Russian gas, it is increasingly dependent on British supplies (71% of gas consumption in 2021) due to the gradual depletion of its Corrib field.

International tax agreement: no effect in 2022, but very uncertain after that

After a deficit due to the pandemic, the public accounts are expected to return to a small surplus in 2022, mainly due to the solid financial performance of multinational companies. The surge in corporate tax revenues will be such that it should compensate for the multitude of measures implemented to deal with the consequences of the war in Ukraine: lower VAT on gas and electricity, discounted fuel prices, reduced public transport fares, and allowances for less well-off households. Public debt, which is relatively modest compared to the Eurozone average, should thus continue to fall. Having signed the International Tax Agreement in October 2021, the country will soon (probably in 2023) increase the corporate tax rate from 12.5% to 15% for companies with a turnover of at least EUR 750 million. The effect of this agreement on the attractiveness of the Irish economy is as uncertain as it is crucial, given that tax revenues depend so much on the activity of multinationals: the share of corporation tax has risen from 7% in 2014 to 25% in 2021. The vulnerability of public finances is all the more significant given that more than half of corporate tax revenues are attributable to just ten multinationals.

Beyond their effect on public finances, the investment decisions of these firms also have a considerable influence on external accounts, which would suffer significantly if multinationals left the country. Indeed, the current version is extraordinarily volatile. While the balance of goods is structurally very positive (39% of GDP in 2021), the ratio of services fluctuates strongly (from a deficit of 19% of GDP in 2020 to a credit in 2021), depending on imports of R&D services (transfers of intellectual property assets from foreign subsidiaries of multinationals to their Irish subsidiaries). At the same time, dividend repatriation by multinationals leads to a structural deficit in the income balance (25% of GDP). Excluding multinational-related effects, the current account has been in surplus since 2015.

Mid-term, irresistible momentum for Sinn Féin, the main opposition party

The February 2020 legislative elections had led, after four months of negotiations, to a coalition between the two rival centrist parties, which have taken turns in power for a century - Fianna Fáil (22%, 37 seats out of 160 in the Dáil) and Fine Gael (21%, 35 seats), and the Greens (7%, 12 seats). Thus, Micheál Martin, leader of Fianna Fáil, succeeded Leo Varadkar (Fine Gael) as Taoiseach (Prime Minister). Then, according to the rotating leadership agreement, he should return to power in December 2022 for the second part of the mandate. However, these elections were marked by the historic breakthrough of the nationalist party Sinn Féin - with a left-wing agenda, but above all in favor of reunification with Northern Ireland - which came first with 24.5% of the vote. In July 2022, when the polls confirmed its irresistible progress, with 36% of the voting intentions, i.e., almost 20 points ahead of the FF and the FG, Sinn Féin took advantage of the loss of the government’s majority in the Dáil - due to the departure and temporary suspension of some rebel MPs - to launch a motion of censure. As some of the independent MPs voted in favor of the continuity of the government, the sign of no confidence was largely rejected (85 votes against, 66 for). While the coalition seems to be able to complete its mandate - which will end in March 2025 at the latest - the momentum is undoubtedly on Sinn Féin at the halfway point. However, because of its links with the IRA, a nationalist paramilitary organization that abandoned armed struggle in 2005, it is isolated in the political landscape, and the other main parties have always (so far) ruled out joining it in a coalition, making it difficult for it to take power.