Fastest-growing European economy since 2014
The successful implementation of policy reforms by the Irish authorities has borne fruit. Ireland has positioned itself as the fastest-growing European economy since 2014.
GDP increased by +5.2% in 2016, mainly driven by domestic demand growth. Continued double-digit investment growth has been supported by the very attractive business and fiscal environment and the UK’s vote to exit the EU. Private consumption has been supported by the labour market improvement and rising wages.
The improving trade momentum at the global scale since H2 2016 and the stronger growth in the Eurozone boosted export performance. The end of deflationary pressures – inflation rate expected at +0.5% in 2017, in positive territory for the first time since 2013 - has also triggered positive nominal effects and helped improve firms‘ pricing power.
We expect trade to remain a key driver of GDP growth in 2017 given the slightly lower EUR (1.08 against the USD after 1.11 in 2016), stronger Eurozone growth (+1.9% in 2017) and the improving global economy. GDP growth is forecast to reach +6.1% in 2017 and +4.2% in 2017.
Inward investments remain significantly above 2012 levels
After an extraordinary boom in 2015, inward FDI positions and M&A volumes normalized last year, though remaining at levels over twice as high as in 2012. New PM Leo Varadkar, appointed in June, will likely keep a very liberal stance on economic and fiscal policy. The 2017 Draft Budgetary Plan includes expansionary measures such as tax cuts that mainly involve entrepreneurs.
The government’s main challenge will be to trigger a new momentum in capital inflows despite a difficult political context – it has a slim majority in Parliament. Yet parliamentary support could be mustered to deal with Brexit’s impact on Ireland.
Firms’ payment behaviour continues to improve, albeit at slower pace
After shrinking by -10% in 2015, business insolvencies continued falling in 2016 (-2%). This reflects the pro-business and low tax economic environment.
The trend is set to continue. We forecast a -8% decrease in bankruptcies in 2017 and -5% in 2018. At 900 in 2018, business insolvencies will remain 2.5 times above the 2007 level.
Corporate debt still at very high levels, but decreasing
The Irish economy’s rebound supports the deleveraging of non-financial corporations due to the increase in corporate margins. Mainly driven by multinationals which account for 2/3 of total corporate debt, corporate indebtedness remains high at 257.4% of GDP but has been decreasing since 2015. This represents a low financial stability risk for the economy as these companies finance their operations on the global capital markets. In addition, firms’ profitability rates are at record high levels, close to 70% of the value added in 2016, hugely outperforming the Eurozone average of 41%.
Downside medium-term risks from Brexit
Ireland is highly exposed to the British economy: the UK is the second-biggest market for Irish exporters. It is also the first import market. Ireland is one of few EU countries to have a goods’ trade balance deficit with the UK.
A UK slowdown in growth or a potential recession - should it exit the EU without a transit deal in 2019 - would negatively impact Irish exports to the UK. This is due to the strong sterling depreciation, which accounts for around 14% of Ireland’s goods export and 20% of services exports. Sectors such as agrifood, chemicals, and electronics would bear the brunt. On the contrary, sectors highly dependent on imports such as agrifood, energy, chemicals, machinery and equipment, wood/paper, and textile are expected to benefit from lower import costs.
The total cumulative impact by 2021 is estimated at -1.2pp of GDP growth and will come from losses in both exports and investments.
Are there any opportunities from Brexit?
We have assessed the tax environment of several European countries in comparison to the UK, to identify its potential competitors in a post-Brexit European Union. By plotting corporate tax rates against withholding dividends tax rates, we find a proxy for business attractiveness.
Four countries stand out. In these markets, low corporate and withholding tax rates are coupled with low employers’ social contribution rates.
Luxembourg looks like the most serious candidate. Its low tax rates combined with its advantageous geographic location – at the heart of Western Europe – could attract many businesses that consider relocating. A 2017 corporate tax cut (from 21% to 19%) signals a will to enhance competitiveness. Ireland, the Netherlands, and Germany are the next in line.
We have also looked at the World Bank’s 2017 Doing Business Index to gauge countries’ effective attractiveness for companies. The UK and the US’s are clear leaders. Yet Germany, Austria, and Ireland are right on their heels. If UK-based companies relocate following Brexit, they will likely bring along at least part of their labour force. Yet it is also interesting to assess the state of the labour force in competing countries. When plotting the Doing Business ranks against the adult education level in those countries, and using the results of the EF English Proficiency Index, the countries with the most favourable tax environments are again among the best performers. Ireland leads the pack, followed by Germany and the Netherlands.