With Ireland on track to lift all remaining major Covid-19 restrictions on 22 October, we sat down with Goodbody Chief Economist Dermot O’Leary to discuss what has been an extraordinary 18 months for the Irish economy.
How do you see the recovery progressing in the Irish economy?
The speed of the recovery has been a lot quicker than we’d have anticipated at the start of the year. In January 2021, we were optimistic that there would be a bounce-back in activity, but lockdown restrictions were soon extended. Nevertheless, despite having some of the most stringent restrictions, it has not really affected the country’s recovery. For example, consumer spending is 14% above its pre-pandemic levels.
The return to offices and workplaces by workers will also have implications for the recovery. In London, for example, we are seeing that more people are spending money in coffee shops and restaurants because they are back in offices.
Overall, the speed of the recovery in Ireland from the pandemic is quick – and there doesn’t seem to be the same scarring that we’d feared, perhaps because of the level of government support during the pandemic.
You mentioned the return to the office, with the hybrid model (combining remote work and office time) in play for many companies, do you see commercial property prices dropping or holding in value?
Again, if you look at London, for example, it gives us some foresight as to what might happen. When it comes to new office space, the space per office worker is increasing – and that’s because of Covid-19 and the need for more concentration of ventilation. So, the demand fall-off is not as big in London as many would have expected owing to these space requirements.
In Dublin, office supply was expected to peak last year. But that’s been pushed out, and we’re likely to see office supply peak in 2022. Already, the vacancy rate has climbed to about 10%, and with office supply coming on next year – of which about 50% is already pre-let – it is likely that the vacancy rate will rise. Over the coming months, there will likely be downward pressure on rents.
The Irish government recently announced ‘Housing for All’ – a new housing plan to 2030 – which includes a big boost to social housing. Do you think it’s achievable?
Social housing is meant to be the stabilising force in any housing market. To increase the target to 10,000 units per annum from 5,000 last year is an ambitious target. But it can be done. In the mid-1970s, 9,000 units of housing were built by local authorities per annum and our population was much lower back then. That said, delivering the ‘Housing for All’ plan will require the help of the private sector – and I’d worry about the cost.
The other aspect of the plan that has laudable goals but may have unintended consequences is increasing homeownership rates through the shared equity scheme. Over the last 12 months, around 1.5x more mortgages were approved than we have new units available for first-time buyers. That may be inflationary in the short term.
So, while the new plan contains laudable goals to try to bring about a stable housing market, the implementation is going to be tricky.
What are the biggest issues for clients both internationally and in Ireland?
Internationally, the biggest issue we are seeing is inflation. We are seeing bottlenecks across the developed world – and we’re hearing about it from company executives when we’re doing conference calls about labour, energy, delivering goods and so on. Delivery backlogs are at multi-year highs. So, people are wondering: what will that mean for the companies themselves? Will they be able to fulfil the demand that’s already there? Another important talking point is the valuation of financial markets – and what that means for central bankers in terms of interest rates.
Domestically, there are two particular issues concerning institutional investors: the OECD agreement on international corporate tax (and the impact Ireland signing up to the framework will have) and politics in Ireland. Indeed, the latest poll from the Irish Times/Ipsos/MRBI showed that Sinn Féin has extended its lead as the most popular party in the State. With less than half of the current government term passed, there is still a long way to go until the next general election in Ireland, but it is clear that the shift heralded in the 2020 election is more than just a fleeting change in the parliamentary arithmetic in Ireland.
As you mentioned, one of the biggest investor concerns is inflation. How will inflation affect Ireland?
We’ve already seen a spike in inflation in Ireland. Annual inflation, as measured by the consumer price index (CPI), hit 2.8% in August. There were weak base effects because of what happened at the start of the pandemic, but that’s beginning to fade. There are underlying price pressures, energy being the most obvious.
Other issues include the cost of shipping. The cost of shipping from Asia to Europe increased 14 times over the last 12 months. That’s because during the pandemic people in the developed world couldn’t spend their money on services – and so, they spent their money on goods. And as Asia is the factory of the world, there’s been a flood of goods coming from there to Europe, but little going back. I think this is a temporary issue.
So, there are temporary issues relating to inflation and more persistent factors, such as energy and labour costs. Labour markets are bouncing back very rapidly, and we are seeing shortages in some areas, leading to price inflation pressures. Inflation is an issue we are not going to escape in Ireland – and it’s more persistent than we thought it was.
Another issue for clients was the OECD corporate tax deal. Ireland has now signed up to the framework – was this expected and how will it impact foreign direct investment (FDI)?
It was likely that the government would eventually sign up to the OECD framework. The decision came on the back of assurances received that the effective minimum tax rate would not go above 15% and that Ireland could maintain a lower rate of 12.5% for businesses with revenues under the €750m threshold. Minister for Finance Paschal Donohoe stated that the change would impact 1,500 foreign-owned multinationals and 56 Irish-owned multinationals operating in Ireland. The new regime is expected to come into play in 2023, as the deal has yet to make it through in various countries.
Although Ireland would have preferred the minimum tax rate to settle at 12.5%, the outcome is better than would have been feared when US Treasury Secretary Janet Yellen called for a 21% rate earlier this year. The tax impact is estimated at €2bn per annum, which we believe may be an upper estimate. On the impact on FDI, previous studies have shown that decisions around the location of FDI are very sensitive to changes in the corporation tax rate, particularly when coming from a low level. This assumes that everything else is equal. But everything is not equal. The new rules provide a global framework to prevent profit shifting behaviour, but Ireland still has one of the lowest corporation tax rates in Europe, while its biggest competitor for FDI (the UK) has decided it will increase corporation tax rates in the coming years, on top of the restricted access it now has to the EU Single Market.
The focus for Ireland must now be on how the country can remain competitive in areas outside of tax such as infrastructure, housing and energy.
To find out more about Dermot’s views on the Irish economy, watch his recent interview with Irish Times Managing Editor Cliff Taylor here.
Missed the Goodbody Investor Summit? Catch up now!
On 30 September, we held the inaugural Goodbody Investor Summit, bringing together some of our brightest minds for a morning of engaging panel discussions and thought-provoking sessions.
Our virtual event delved into the key issues and themes shaping the investment landscape – from inflation and negative interest rates to environmental, social and governance (ESG) investing and the art of picking great companies.
Missed the Investor Summit or want to revisit a topic? Watch the sessions here.