Central Bank: Irish economic outlook 'exceptionally sensitive' to global developments
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Constraints and structural vulnerabilities in the economy as well as its significant potential exposure to policy changes in the US means Ireland is “exceptionally sensitive” to global economic developments such as trade tensions, the Central Bank of Ireland has warned.
In its latest quarterly bulletin, the Central Bank noted that the public finances rely on a relatively narrow tax base, especially as it relates to corporate tax, chiefly from US multinationals, which “needs to be addressed”.
It added that “infrastructural constraints that limit further sustainable growth in living standards have become apparent”.
On housing, it said the high costs and delays in the delivery of housing leads to an increase in prices which in turn “feeds through to higher wage demands and a higher cost of living and doing business more generally, thus damaging competitiveness”.
Director of economics and statistics at the Central Bank Robert Kelly said that while the outlook for the domestic economy is favourable going into 2025 “Ireland’s current infrastructural constraints will limit further sustainable growth”.
“With the rising risk of geoeconomic fragmentation, and the extensive trade and investment links between Ireland and the US, the Irish economy would be particularly susceptible to changes in US policy on trade and tax.”
The Central Bank said that while the specific actions the incoming US administration might take have yet to be made clear, higher tariffs or changes in tax regimes that reduce the profitability of US multinational operations in Ireland could influence future investment decisions here, employment levels, and potentially impact corporation tax receipts.
The US could also bring changes to its taxation policy — whether that be the headline corporation tax rate or incentives for capital investment — may change the incentives for US companies to retain such intellectual property assets and the related profit in their Irish operation.
This in turn could severely impact Ireland corporation tax receipts.
“In the near-term, the most immediate effect of a changed corporation tax regime in the US could be a significantly more negative outlook for the public finances in Ireland,” the Central Bank said.
In its outlook, the bulletin noted that households’ real incomes continue to rise, with inflation expected to remain below 2% on average over the forecast horizon.
Real income growth per household is forecast to average 1.8% between 2025 and 2027 bringing average household purchasing power to 8.4% above its 2023 level in 2027.
The Central Bank said modified domestic demand (MDD) — a measure of growth in the economy that strips out some of the activity of multinationals — has grown by 3% during the first nine months of the year.
As a result of expected growth in consumer spending as well as the additional Government spending as announced in the budget, MDD is forecasted to grow to 3.1% next year and average 2.5% in 2026 and 2027.