Understanding what is really going on in the Irish economy is always a challenge, and not just because of the distortions contained within the gross domestic product (GDP) metric.
On the surface the Irish economy appears to be doing very well. The country has an unemployment rate of 4.3 per cent of the labour force; employment is at a record high of 2.7 million; tax revenues hit another record level last year, and so far this year VAT and income tax are still strong, although corporation tax is under some pressure, which is believed to be due to timing issues; household deposits are at historical highs; in the first two months of the year the volume of retail sales is 3.2 cent ahead of last year; new car registrations are 9.7 per cent ahead of last year; and merchandise exports showed annual growth of 22.1 per cent in January. The multi-national sector is also looking pretty vibrant.
These are all strong statistics indicative of a decent level of activity in the economy. Yet, I spoke at a couple of business events during the week, dominated by SMEs across many different and diverse sectors, and the mood I encountered was less than stellar. In fact, it could be characterised as generally pretty downbeat and nervous. Business owners and managers spoke about a very cautious consumer searching for value and reluctant to spend; an onerous cost environment; staffing issues; an inability to pass on higher prices, implying margins are being severely pressurised; and business customers are also reluctant to spend money.
It is all well and good to have someone such as me in an ivory tower spouting out strong aggregate statistics, but the reality on the ground is that the business environment is genuinely challenging. Apart from the general challenges posed by higher interest rates; labour scarcity; a still uncertain global economic background; high energy costs and challenged customers, the introduction of several labour-market measures by Government is exacerbating the business pressures. Without action, these pressures are set to intensify.
The State-induced measures I have written about before, but they are worthy of being repeated in a week when a new Taoiseach has assumed power, stating that we ain’t seen nothing yet. The State-sponsored measures include the increase in the national minimum wage of 12.4 per cent on January 1st; the increase in the VAT rate from 9 per cent to 13.5 per cent on 1st September 2023; statutory sick pay changes; the move towards a living wage by 2026; parental leave changes; the extra bank holiday; higher PRSI; and auto-enrolment for pensions. The measures will combine to increase costs significantly for SME businesses across diverse sectors. These businesses were already under significant pressure due to higher energy costs, higher food prices, labour shortages, and other input costs.
The concept of the challenged customer is worth examining. Although the headline rate of consumer price inflation declined to 2.9 per cent in March, the cost-of-living has escalated quite dramatically over the past while. Between January 2021 and March 2024, the average cost of living increased by 19.6 per cent; the cost of food is up 20.7 per cent; the cost of health insurance is up by 16 per cent; the cost of mortgage repayments is up by 77 per cent; rents are up by 27.5 per cent; electricity is up by 55.7 per cent; and the cost of eating out is up by 17 per cent. Threse are dramatic price increases and explain what we mean by the cost-of-living crisis. Wages have certainly not gone up by anything approaching these price increases. Businesses are dealing with a squeezed consumer who is seeking value for money and is squeezing many business margins.
The Government and the incoming Taoiseach appear to have taken the mood music on board and a package of business support measures is thought to be imminent. These measures are likely to include changes to the PRSI charge for lower paid workers, and a possible postponement of some of the social measures, such as sick leave. This government has spoken in the past of the need to help those who get up early in the morning, and the coming weeks will test the validity of that commitment. In particular, it will be interesting to see if the SME sector is actually valued. Over to you Simon Harris.
There was a comment piece on this issue from ICTU in today’s Irish Times, could you address its points in a future pod? Thanks