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2023 Article IV Consultation Summary: Ireland

Core Content

The International Monetary Fund (IMF) conducted the 2023 Article IV consultation with Ireland, concluding that the economy has shown remarkable resilience in the face of recent consecutive shocks. The consultation assessed the country's economic performance, fiscal and financial policies, and structural reforms, while highlighting both positive developments and key risks.

Main Economic Developments

1. Economic Performance

• Ireland's economy has maintained solid performance despite slowing from two years of strong growth.
• Modified Gross National Income (GNI*) growth is projected to moderate to 2.5% in 2023–24, from a very high base, and is expected to converge to its potential of 2.25% over the medium term.
• Real GDP growth is expected to be 1.5% in 2023 and 2% in 2024 as economic activities normalize.
• Inflation is easing but remains above the ECB target, with a projected decline to 2% by late 2025.

2. Fiscal Position

• The fiscal position has strengthened significantly due to strong tax revenues, particularly from income tax (CIT) and VAT.
• The general government recorded a surplus of 1.7% of GDP in 2022, with tax revenues (excluding CIT) up by 6% (y-o-y) in 2023:H1.
• However, CIT collections have declined in recent months, indicating volatility in this revenue stream.
• Budgetary support for cost-of-living measures has totaled €12 billion since 2022, with €9 billion allocated in 2023.

3. Labor Market

• The labor market remains tight, with an unemployment rate of 4.8% in October 2023, still below pre-pandemic levels.
• Hourly wages grew by 5.1% in the second quarter, nearly matching inflation.
• High-frequency data suggests some easing of labor market pressures in Q3, but no sign of a wage-price spiral.

4. Current Account

• The current account surplus increased to 12% of GDP in 2023:H1, driven largely by the MNE sector.
• However, goods exports slowed due to reduced global demand for pharmaceuticals, semiconductors, and contract manufacturing.
• Services exports remained strong, supported by the robust ICT and business services sectors.

Key Risks

• External Risks: Further weakening of global demand, renewed commodity price surges, intensification of conflicts (e.g., Russia-Ukraine, Gaza-Israel), and tighter-than-expected global financial conditions could negatively impact the outlook.
• Geoeconomic Fragmentation: Ireland's open economy is vulnerable to deepening fragmentation, which could affect trade and investment flows.
• Domestic Risks: Supply-side constraints, particularly in the construction sector, may limit growth and exacerbate housing shortages. Prolonged inflation could also erode consumer purchasing power and confidence.

Policy Discussions

A. Fiscal Policy

• Disinflation and Stability: Fiscal policy should support disinflation without adding to aggregate demand, especially given the still-elevated core inflation.
• Buffer Building: Given Ireland's exposure to external shocks and future spending pressures, prudent fiscal policy is essential to build adequate buffers.
• Tax Base Broadening: There is a need to broaden the tax base and improve the efficiency of public investment.
• Fiscal Impulse: The 2024 budget is slightly expansionary, with a projected general government surplus of 1.6% of GDP and a small positive fiscal impulse.

B. Financial and Macroprudential Policies

• Financial Stability: Tighter financial conditions, persistent inflation, and rising vulnerabilities in the commercial real estate (CRE) market require continued vigilance.
• Supervision: Intensified supervision of credit and liquidity risks for domestic retail banks is necessary, and close monitoring of international banks' funding stress is recommended.
• Macroprudential Measures: The Central Bank of Ireland (CBI) has introduced macroprudential measures, including a gradual increase in the Countercyclical Capital Buffer (CCyB) to 1.5%, which is welcomed.
• Non-Bank Sector: Ireland's efforts to develop a macroprudential framework for non-banks are commendable, and continued collaboration with regional and international institutions is advised.

C. Structural Reforms

• Housing Supply: Policies to increase housing density, remove rent controls, and improve productivity in the construction sector are crucial for addressing housing shortages.
• SMEs and MNEs: Strengthening linkages between domestic SMEs and MNEs through supply chain integration, labor mobility, and innovation cooperation can enhance productivity.
• Climate Commitments: Ireland needs to accelerate progress in reducing carbon emissions to meet its ambitious climate goals.

Executive Board Assessment

• The Executive Board endorsed the staff's assessment, noting that Ireland is well-positioned to achieve a soft landing.
• Continued fiscal prudence and monetary tightening are necessary to sustain disinflation and build buffers.
• Structural reforms are essential for boosting growth and supporting the green transition.
• The implementation of past IMF recommendations and FSAP key recommendations has been largely successful.

Key Recommendations

• Maintain fiscal prudence and avoid using excess CIT revenues for permanent spending.
• Continue to build buffers for future shocks and spending pressures.
• Broaden the tax base and improve the efficiency of public investment.
• Strengthen macroprudential oversight, particularly for non-banks and CRE.
• Address supply-side constraints, especially in the construction sector, to improve housing supply and economic resilience.
• Accelerate structural reforms to enhance competitiveness and adapt to evolving globalization.

Summary of Key Figures

Conclusion

The IMF concluded that Ireland's economy has demonstrated resilience in the face of multiple shocks, with a positive outlook supported by strong fiscal and monetary policies. However, external risks and domestic challenges remain significant, necessitating continued vigilance and structural reforms to ensure long-term stability and growth. The country is encouraged to maintain fiscal discipline, enhance financial sector resilience, and accelerate progress on housing and climate objectives.