BY JOHN ELLIS, FINANCIAL ADVISOR
Six months into 2024, there is a growing sense of optimism about the global economy. Energy and food prices have decreased, inflation is gradually easing, and interest rates are falling. The European Central Bank (ECB) cut interest rates by 0.25% earlier this month, with further reductions of about 1.5% expected over the next 18 months.
Ireland’s economy continues to perform reasonably well. In the first quarter of 2024, the country saw GDP growth of 0.9%, marking the end of a technical recession. The labour market remains strong, with employment reaching a record 2.704 million by the end of March and unemployment at 4% in May.
Households in Ireland are generally in a strong financial position. Household savings were approximately €154.6 billion in March 2024, with outstanding household credit at €101.5 billion. This is a notable change from 2007, when credit far exceeded deposits. The situation has been reversed since 2015 due to a robust economy and stringent Central Bank mortgage regulations.
The tax take is holding steady, and exports, particularly in pharmaceuticals, are rebounding after a sharp decline due to the COVID-19 pandemic.
However, consumer spending is under pressure due to cost-of-living increases, and the small and medium-sized enterprise (SME) sector faces significant challenges.
Housing remains a critical issue. The Commission on Housing reports a deficit of between 212,500 and 256,000 homes as of the 2022 Census. This shortage is due to low construction levels after 2008, static household sizes, limited availability of housing, and high homelessness rates. Despite 32,626 residential units being completed in 2023, it will take years to meet the actual and latent demand, necessitating urgent measures to boost supply.
Global geopolitical tensions are a cause for concern. The continuing wars in Ukraine and Gaza, a strengthening China-Russia alliance, and weakening relations between China, Russia, and the West add to the uncertainty.
Despite these challenges, a report authored by Jim Power of Aviva Life and Pensions offers a positive outlook for the next 12 months. Inflation is expected to average around 2% this year, while wages are projected to rise by about 4%. Interest rates are likely to continue their downward trend, and fiscal policy remains expansionary. Public expenditure is set to rise significantly, aimed at addressing pressures on health, housing, and the cost of living.
Budget 2024 included a significant financial package, and despite warnings from the Irish Fiscal Advisory Council (IFAC) and Gabriel Makhlouf of the Central Bank, a similar approach is expected for Budget 2025, set for early October. With the general election looming, there is a strong incentive for a generous budget, including substantial income tax reforms. These may include widening tax credits and USC bands and increasing the standard rate tax band.
While Ireland faces significant challenges, the economic outlook remains optimistic, driven by “strategic fiscal policies and a resilient labour market.” Jim Power says: “The nation must navigate global uncertainties and domestic issues like housing to maintain its positive trajectory.”
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