Could Ireland weather a tariff and FDI shock?

RTÉ News​

7 days ago

An escalation in trade tariffs could lead to a slowdown in global and Irish growth this year and next, according to AIB's latest Economic Outlook Report.
The forecast comes after Friday's announcement by US President Donald Trump of a 50% tariff on EU imports to the US, which he has since confirmed will come into effect on June 1.
Each report has a theme in focus, and this one is "Could Ireland weather a tariff and Foreign Direct Investment (FDI) shock? – A balance sheet perspective".
A timely question.
It finds the Irish economy has built up resilience to withstand potential trade and FDI shocks in the short run.
However, permanent tariffs or changes to the US tax code which would reduce Ireland's FDI attractiveness, would pose a greater longer-term challenge.
The latter scenario would require diversifying Ireland's FDI and export base to non-US markets, a review of our industrial model, further fostering of indigenous enterprises, and a focus on boosting competitiveness.
Irish modified domestic demand is forecast to grow by 2.3% this year, 2% in 2026 and 2.6% in 2027, according to the bank.
Irish households are expected to pare back spending growth while some business sectors may delay planned investments, particularly those in export-orientated sectors.
The report reveals recent consumer spending has been robust. Public and private sector balance sheets have low debt levels and high savings on aggregate.
While economic risks are tilted to the downside, balance sheet resilience remains a mitigant.
The report finds US tariffs and future US tax policy are the main downside risks to the Irish economy.
Some exporting indigenous Irish sectors such as agri-food are exposed to US tariffs, but the key risk centres on Ireland's multinational-dominated sectors.
These sectors, which account for around 12% of total employment, are responsible for 50% of GDP and around 80% of exports generated in the economy.
There is a heightened risk of tariffs on the Irish pharma sector, which, along with technology services, dominates multinational sector output.
According to the forecast, any negative spillovers from the multinational sector could hit domestic sector output and employment. However, the key medium-term risk to the Irish economy is the concentration of our taxation base in corporation and income taxes sourced from the multinational sector.
The report forecasts continued growth in the labour market, but given the expected easing in economic growth, we expect a more modest expansion in employment.
Following a 2.7% rise in 2024 we see employment growth slowing to 2% in 2025, 1.5% in 2016 and 1.8% in 2027.
Although supply chain spillovers from the multinational sector to the domestic economy are significant, the employment footprint of the sector is relatively small, and generally focused on urban centres.
AIB Chief Economist David McNamara said "The global macro backdrop has shifted considerably since our last Economic Outlook in Autumn 2024. The uncertainty created by the dramatic shift in US trade policy and the responses of other key trading blocs, is expected to dampen global growth in 2025 and 2026.
"Given the globalised nature of the Irish economy, we expect significant volatility in GDP as exporters seek to get ahead of potential trade restrictions this year," Mr McNamara said.
"For the domestic economy we expect a cooling in growth this year, as ongoing uncertainty dampens both consumer spending and business investment growth. Nonetheless, Ireland enters this period of uncertainty from a position of strength, with the economy growing at a robust pace in recent months, while both the public and private sectors have built up material financial buffers in recent years."