Analysis: The jump in the unemployment rate may be a warning light for the economy

Irish Examiner

2 days ago

By all measures, the Irish labour market has been remarkably resilient. For well over three years, the economy has been operating at near full employment, all the while weathering surging inflation, rising interest rates, and a resulting cost-of-living crisis.
Throughout all of this, the unemployment rate remained consistently low. Between January and June this year, the monthly rate remained very steady between 4.5% and 4.6%. However, a sudden jump to 4.9% in July spooked economists, with some already sounding a note of warning over what this could mean for the economy.
The last time the unemployment rate was this high was March 2022 as the country came out of the pandemic.
In the grand scheme of things, this is a small jump in unemployment with just 8,600 fewer people employed, compared to June, out of a total workforce of just over 2.9m. The worry, however, is that this might just be a sign of things to come.
Chief economist at Grant Thornton, Andrew Webb, said the increase was a 'warning light on the economic dashboard' adding that 'rising global uncertainty and the growing risk of tariffs are making firms more cautious'.
Given the rising trade tensions and dimming global economic outlook, which have persisted ever since US President Donald Trump was sworn back in, a number of economic institutions have already forecast that the economy is to slow over the coming years and for the unemployment rate to go up.
The problem? The July unemployment reading was even higher than expected.
During its latest quarterly bulletin, the Central Bank of Ireland forecast the unemployment rate for all of 2025 to stand at 4.5% before increasing to 4.8% next year. The Economic Social and Research Institute (ESRI) forecast the rate to remain just over 4% this year and next year.
On its own, one month's unemployment rate wouldn't be enough to cause panic - especially considering that the rate remains low by historical standards - but the issue is that Ireland and the rest of the EU are now entering a new dynamic with its main trading partner which is expected to slow down growth and hurt firms on either side of the Atlantic.
Late last month, EU Commission President Ursula von der Leyen met with Mr Trump to finalise a trade deal in which the US president set a tariff on EU goods entering the US at 15% - up from the 10% which had been in place for months.
There was some sense of relief in Government circles as well as the wider business community because while a 15% tariff on EU goods is a bad deal, it was probably the best on offer from the often mercurial Mr Trump who could have followed through with his initial threat to impose a 30% rate.
The argument was that at least the agreement provided some stability for many Irish exporters but the tariffs are still expected to hit the jobs market. Firms facing reduced demand for their products in the US will look to cut costs or pause hiring decisions until things improve.
The Department of Finance estimates that the 15% tariff will result in up to 70,000 fewer jobs being created over the next five years.
However, recently, that promise of stability evaporated, creating potentially another headache for the Government and a hurdle for the economy. Last week, Mr Trump said US tariffs on pharmaceuticals could reach as high as 250% and he is planning on levying a 100% tariff on semiconductors.
The pharmaceutical sector, and to a lesser extent the semiconductor sector, are critical pieces of the Irish economy, providing significant employment as well as accounting for much of the country's exports.
The threat of tariffs that high alone might be enough to deter these companies from investing further in Ireland, leading to fewer jobs being created, and firms may even seek to move jobs elsewhere.
The result of all of these challenges and continuing uncertainty is that businesses are likely to be more cautious with their investment and hiring decisions, and the higher unemployment rate may be a sign of this already taking place.
Should the unemployment rate continue to rise, the economy will start to slow, leaving the Government with a headache to deal with. The summer economic statement last month outlined an overall budget package of €9.4bn for next year, of which €1.5bn is set to be tax measures and €7.9bn will be additional spending.
The sudden jump in July's unemployment rate could be a blip in the data, but if this downward trend continues, don't be surprised if the Government takes a more conservative approach to the budget later this year, where spending increases may be pared back and tax promises dialled down.