27 March 2023

Still basking in the glow of another Saint Patrick’s Day celebration, Ireland was crowned the Six Nations rugby champions. As the world’s top-ranked team, the nation eagerly anticipates this autumn’s World Cup in France. Sure, Irish eyes are smiling indeed!

But, that not all Ireland has to celebrate these days. Despite current global uncertainties, Ireland’s economic model is paying dividends, and the nation is outperforming neighbouring countries. In an earlier blog, I suggested that Ireland may prove to be a beneficiary of Brexit. There are early indications that this is already happening. Moreover, UK Prime Minister Sunak’s Windsor Framework increases the likelihood that Brexit can be achieved without violating the Good Friday Agreement; thereby, maintaining an open border between Northern Ireland and the Republic. Perhaps most importantly, these good times could continue in the coming decade, if Ireland successfully implements key policy initiatives. (I will rely heavily on lots of my favourite charts, and spare you “the gift of gab”.)

Ireland: Europe’s Top Performer

Since 2015, the global economy has been hit by numerous shocks: Brexit, Covid, and the Cost of Living crisis (COLC). The chart above, however, illustrates Ireland has navigated these volatile times more successfully than other EU nations and the USA (Ireland’s data has been modified to account for the inflating impact of foreign-owned enterprises).

Moreover, Ireland’s economic model has paid dividends: the country’s performance has relied on superior growth in exports and capital spending (although consumer spending gains also outpaced Europe 12% to 8% during the interval). In particular, observe the UK’s post-Brexit underperformance (relative to both Ireland and the EU average). Also, Ireland has outpaced the emerging Central European nations.

To be sure, Ireland has not escaped the impact of rising energy and food prices generated by the war in Ukraine. Indeed, Ireland is especially dependent upon imported energy (Chart above). However, Ireland’s economic ties with Russia, including reliance on Russian energy, are minimal (Figure below).

As a result, the economic consequences of the war have been relatively less severe than in other European nations. For instance, Irish inflation is well below the European average. And, while “core” inflation is still rising in the Eurozone, underlying price growth has already peaked in Ireland (next Chart).

Reflecting Ireland’s GDP outperformance, the nation’s unemployment rate remains well below Europe’s average (next Chart).

Brexit: And, the Winner (Loser) Is…..?

In an earlier blog, I suggested the Brexit decision will leave the UK economy 5-10% smaller over the next generation — not dissimilar to the independent UK Office of Budget Responsibility’s recent 4% long-term projection. In addition, I suggested the Irish economy would significantly outperform the United Kingdom, and potentially emerge as a Brexit victor.

A key feature of the UK’s recent economic performance has been the so-called “productivity puzzle” — the virtual stagnation in efficiency growth since the Global Financial Crisis (GFC). Brexit will exacerbate the problem, as competition in trade and the labour market weakens. On the other hand, Ireland is not similarly “puzzled”: indeed, Irish productivity is amongst the highest in the world, and has risen sharply since Brexit (Chart above).

Likewise, divergent capital spending trends helps explain the gap in productivity performance. Indeed, the earlier Chart (at the beginning of this blog) illustrates that business investment has been a key contributor to Irish GDP growth since 2015 (advancing 37%). In contrast, reflecting post-Brexit economic uncertainty, UK capex has virtually stagnated (up a mere 3%) during the same period (earlier Chart).

Foreign investors have have shown a similar bias. To be fair, the UK has attracted GBP 361 billion in foreign direct investment inflows since 2015 — an impressive 2.5% of GDP annually (although one transaction in 2016 accounted for 50% of the overall amount). Perhaps investors have been attracted by the undervalued sterling exchange rate. During the same interval, meanwhile, Ireland has attracted GBP 225 billion — a staggering 14% of GDP per year (actually modified GNI for the statistical purists). As a percent of GDP, the outstanding stock of FDI inflows into Ireland is 7 times the level into the United Kingdom (Chart above). I continue to believe foreign investors seeking a high-productivity, English-speaking base in Europe may consider Ireland over the UK in the post-Brexit environment.

In addition, Ireland’s solid population growth — reflecting its healthy birth rate and liberal immigration policies — supports its long-term GDP growth advantage relative to the rest of the European Union. Similarly, with the United Kindgom aiming to limit post-Brexit immigration, Ireland will enjoy a demographic advantage compared to its larger neighbour. This will be especially important during the current period of labour scarcity.

Supply-Side Reform Agenda: Unlocking Future Growth

As impressive as Ireland’s relative economic performance has been, formidable supply-side constraints still are impeding the nation’s long-term potential. The good news is that successful implementation of the government’s reform agenda could unlock future possibilities, and prolong the period of outperformance for another decade (the OECD’s country survey provides a good summary).

To be sure, Ireland’s productivity performance has been enviable; however, the bulk of the gains were in foreign-owned firms (Chart above). Indeed, Irish firms have not avoided the post-GFC efficiency slowdown experienced in other countries. Barriers to entrepeneurship are formidable in Ireland. And, high taxation, especially of lower-paid labour, provides disincentives to work and improve effiicency (next Chart).

The lack of affordable housing is a chronic supply-side economic contraint. While insufficient housebuilding is a well-known problem, the situation actually has worsened in the past decade, unlike in the rest of the European Union (next Chart). And, Irish household’s spend nearly 30% of their income on housing outlays compared to the OECD average of 22%.

Irish government debt remains above 100% of GDP. In addition to the priority given to boosting outlays on infrastructure, there will be substantial pressure to increase public sector spending in other areas. In particular, as in other developed nations, Ireland’s aging population will require additional spending on health care and pensions. Excluding the USA, Ireland’s health-related outlays are already the highest in the OECD (next Chart). Improved efficiency in the health sector will be required to meet this challenge, especially following a long period of under-investment in hospital facilities. Fortunately, as a result of strong economic growth, Ireland may be able to meet these challenges better than other countries without increasing its debt burden.

Finally, Ireland will require considerable investment to meet its climate commitments. Indeed, despite considerable reductions, the nation’s greenhouse gas emissions compare unfavourably to other European nations (next Chart). Priority must be given to the agricultural sector, which is responsible for nearly 40% of the nation’s emissions compared to 10% in the European Union overall. In addition, investment in electric vehicles and public transport will be needed to curb pollution from the transportation sector. Despite increasing substantially in recent years, Ireland’s usage of renewable energy sources continues to lag other key European nations.