Having been tested by the global financial crisis over a decade ago and the now by the Covid-19 crisis, Ireland’s economy has shown tremendous economic resilience. It came back strong from the former and signs are that we will bounce back robustly from the current difficulties.
That makes Ireland a great bet for Canadian businesses looking to diversity their markets and build their global portfolio. We’ve a very business friendly approach to all business, whether large corporations or SMEs. Ireland and Canada have a lot in common and CETA is already spurring our bilateral economic relations. Come Brexit in January, Ireland will be an ideal platform for entry to the massive EU market and all the global markets embraced by the EU’s 70 preferential trade deals. And if there is one lesson for business from Covid-19, it is the need to diversity markets and supply chains.
Here are the facts, a quick take on Ireland’s fiscal and economic health and a look ahead to 2021. Unfortunately, I have to mention the dreaded Brexit, the Grinch that stole more than one Christmas!
As of August, the Exchequer recorded a deficit of over €9 billion, a deterioration of €8.8 billion on the same period last year. The deficit to date is driven primarily by increased public expenditure, particularly in the areas of health and social protection, as a direct result of the pandemic. Total net voted expenditure of €43.2 billion at end-August was 21.0% or €7.5 billion ahead of profile.
Tax revenue has, on aggregate, performed above expectations due to resilient Income Tax and Corporation Tax receipts, but nonetheless shows a year-on-year decline, with particularly steep falls seen in VAT and Excise duties, reflecting the fall in personal consumption.
The Government has intervened on an unprecedented scale to support the economy, including a stimulus package of €5.2 billion in July, targeted at the most affected sectors with the objective of getting as many people back to work as quickly as possible.
This public deficit impact
The budget deficit impact is in line with most other European countries. However, Ireland is committed to remaining in the ‘middle of the pack’ and restoring the public finances to a credible and sustainable footing so not to risk becoming a fiscal outlier over the longer term.
This we believe is the wisest course, avoiding any dramatic retrenchment that hinders recovery while retaining our bond market credibility. The result is shown in the market: our costs of borrowing are at historic lows. We retain at least an ‘A’ grade status with all major sovereign debt rating agencies, with all forecasting a stable outlook. It signals too confidence that Ireland has the capacity to recover from the effects of the pandemic just as robustly as we did from the financial crisis.
The Irish economy entered the Covid-19 induced crisis from a position of strength, with GDP growth of 5.6 per cent recorded in 2019. In the Stability Programme Update in April, the Department of Finance forecast a decline in GDP of 10.5% for 2020 (15% of modified domestic demand), with GDP growth of 6%.
The contraction in the second quarter of 2020 was less severe than anticipated, due to the earlier than expected reopening of the economy and robust export performance. This reflected Ireland’s sectoral strengths in pharma, Medtech, digital services and financial services generally. However, the hit was still huge, with a fall of 6.1 per cent far surpassing the 4.7 per cent decline recorded in the fourth quarter of 2008 when the GFC impacted us. So a huge hit but not as severe as in the UK, Eurozone and the US where GDP declined by respectively 20, 12 and 9%.
In terms of unemployment, the situation is a tad complicated and the CSO has provided a helpful note on it here. In essence, simply receiving Covid-related income support does not meet the EU definition of unemployment. Using the standard definition (actively looking for work), indicates an employment rate in November of 7%. Including Covid-related payments means that we went from full employment at the beginning of the year to an unemployment rate of 29% by April, pegged back to 15% by now. So we can probably expect that once Covid restrictions are lifted in 2021, employment levels in Ireland will show resilience, particularly as domestic demands returns with a vengeance.
In terms of trade, we see also signs of resilience. The CSO reports that exports increased by almost €1.5 billion in September bringing value of goods exported to €14bn, an increase of 12% when compared with September 2019. The value of goods exports for the period January to September 2020 was €122bn, an increase of 8% when compared with the first nine months of 2019. Much of this resilience is due to exports of Medical and pharmaceutical products, up 17% and accounting for 40% of the total value of goods exports. Our food sector also showed resilience, up 5%. We took a hit with exports of electrical machinery, apparatus and appliances down by 8%. Overall, goods imports dropped by 7% in the first three quarters of this year so our overall trade balance is looking healthy.
On services, we simply cannot see the picture for 2020 yet because of the lag in statistics. It is a much more problematic exercise gathering services data. However, services comprise half of our exports and we have very strong digital services. According to the DHL Global Connectedness Index, Over the twelve months to mid-2020, cross border internet traffic increased by almost 50%, double the previous average. (If you want a confidence boost about the future of globalisation, read Gillian Tett’s take on the Index in the FT here.) I’d hazard that when we do see the figures, Ireland will see resilience there too simply because Covid has acted as an accelerant for digital services that were already powering ahead.
News just in this morning from the Central Statistics Office; the economy bounced back sharply in the third quarter with growth of 11% and all sectors experienced resurgence, particularly those with a domestic focus; consumption, construction, distribution, and hospitality. Exports also saw a hop of 5.7%.
There is no gainsaying it, Brexit is going to be a hit on our economy. However, because we rely on Britain for only 14% of our trade (down by magnitudes historically) and because we are so globally integrated, we will weather the disruption come January in good shape in macro-economic terms.
Because the hurt will be felt most by our indigenous sector and SMEs, the Government have €340 million set aside for support and mitigation. New logistical arrangements are in place to get our goods directly to the EU rather than via Britain. The Government has also established a €3.4 billion Recovery Fund to stimulate increased domestic demand and employment in response to COVID-19 and Brexit. The Recovery Fund will allow the Government to react swiftly and flexibly to provide support for infrastructure development; reskilling and retraining; and investment and jobs.
We might see a few bumpy quarters ahead but the prospects for the Irish economy are to my mind great. Why the confidence?
The sectors we are strongest in are the sectors of the future; life sciences, Medtech, pharma, ICT, financial services and services generally, digital services, and high quality/high value ethical food. We are investing in our infrastructure through Project Ireland 2040. We are investing in our overseas footprint and market presence in Global Ireland. We are investing in the talents and training of our people through Future Jobs.
We are committed members of the EU, the Single European Market and the Eurozone, the strongest most integrated region in the world today, stronger than most of the world’s largest countries. We share the EU vision for a future that is green, economically sustainable, digital, financially robust, innovative, and welcoming of talent.
In the immediate future, Ireland will be part of the EU’s massive stimulus package, a total of €1.8 trillion – yes, that is CA$2.8 trillion – to help rebuild a post-COVID-19 Europe that will be greener, more digitised. and more resilient than ever.
Above all, I am confident because the Irish people are looking to the future, not to the past. We understand the lessons of history. That cooperation and making friends are better than going it alone, without partners.
That change and adaptation are good and that the best innovation comes from sharing not competition (think Covid vaccines).
That talent is to be welcomed – today some 17% of people in Ireland are foreign born and one in eight don’t speak English at home.
We value free trade, globalisation, the rule of law, and the universal applicability of human rights. We put a high value on well-being and equality.
In short, we’re pretty much like Canada.
4 December 2020