Inflation loosens its grip as labour market tightens

Several key themes dominate the economic picture this quarter, all of which are contributing to a level of cautious optimism that the economy is moving into a more settled and predictable phase. Of course, this must be caveated by noting that shocks have hit at pace over the last few years and the possibility of more cannot be ruled out.

Since the last Dublin Economic Monitor in March, inflation, as measured by the Consumer Price Index, has started to fall back. The annual rate of inflation eased from 7.7% in March to 7.2% in April. Although this is now heading for a 20 month streak where inflation has exceeded 5%, 7.2% is the lowest inflation rate since April 2022 and is two percentage points off the 9.2% peak reached in October. Inflation does therefore appear to be loosening its grip.

With high rates of inflation, many Central Banks have been increasing interest rates. This is a finely balanced tactic which could restrict economic activity to the point of creating a recession. Central Banks do not yet believe they have beaten inflation but the European Central Bank’s decision to implement a 25 basis points increase rather than a fourth consecutive 50 points increase in their most recent announcement perhaps signals that we are reaching the end of this cycle of rate increases.

Other elements of the economy which are providing reasons to be cheerful include the labour market’s performance and, to a somewhat lesser extent, sentiment indicators. With Irish unemployment now below 4%, there are 15,000 fewer people unemployed than a year ago. This is an exceptional performance in the context of the economic challenges faced over the past number of years.

Consumer sentiment in positive territory yet challenges persist

Consumer sentiment has been moving into stronger positive territory. Despite a slight decline in March, (the Credit Union sentiment index declined from 55.6 to 53.9 between February and March) consumer confidence is considerably better than last autumn. It is not all good news on consumer sentiment, however. Irish consumers remain strongly of the view that their household finances will weaken further in the next twelve months, a direct link back to the inflation challenges and the fact that wages are not keeping pace.

When these various factors are considered, there is a consensus view from forecasters that Ireland will post growth this year and next, albeit at a lower level than in the recent past. The International Monetary Fund sees the Irish economy expanding by the fastest rate in the Eurozone over the next two years - by 5.6% this year and by 4% in 2024. Modified Domestic Demand (which is seen as a better estimate of the domestic economy as it excludes those large transactions of foreign corporations that do not have a big impact on the domestic economy) is also projected to grow in 2023, with the Irish Central Bank’s latest quarterly bulletin suggesting 3.1% growth in real terms.

Skills under the spotlight

Of particular note this quarter has been the launch of a major Organisation for Economic Co-operation and Development (OECD) study on Ireland’s skills which signalled the launch of the 2023 European Year of Skills. This report finds that while the share of young adults with a third level degree is significantly above the OECD average, many Irish adults are at risk of falling behind as they are unprepared for changes in the world of work. Further, the evidence gathered by the OECD suggests that there are significant challenges ahead with labour shortages, slowing productivity growth and the need to successfully navigate the skills implications of the green and digital transformation of our economy. This has significant implications for Ireland’s ongoing competitiveness, a point which has been recognised at Government level with Minister Harris agreeing to report back on the impacts of this OECD study, including –potentially – a new Skills Act.

As the economy continues to navigate ongoing uncertainty in the near term, the renewed focus on key competitiveness issues that will impact over the longer term is encouraging.

Retail & Renewables to the Fore in Early 2023

Labour Market Undulations Continue

The Dublin labour market continued to experience undulations in the first quarter of 2023 with mixed news across multiple sectors. While the economy remains close to or at ‘full employment’, the technology sector has suffered job losses over the past number of quarters. This continued – albeit to a lesser extent – in early 2023, with job listing website Indeed announcing 225 job losses at its Dublin office, and each of Google, Meta, Amazon and Workhuman announcing further cuts.

More encouragingly for the technology sector, ThreatLocker and Slalom announced the creation of 120 jobs and 50 jobs in the Capital respectively. Hundreds of additional jobs were also created in the wider economy in the first quarter. This includes Ryanair’s plans to develop a €40 million hangar and aircraft maintenance facility at Dublin Airport with the creation of 200 new engineering and aircraft mechanic jobs. Aldi and Ikea have also announced plans to recruit 120 and 100 new staff members respectively to accommodate further expansions in activity in the Capital.

Retail Recovery Gathers Pace

The recovery in the Capital’s retail sector continued in Q1. While Grafton Street and its environs has recovered relatively swiftly post-pandemic, activity in Dublin 1 had been slower through 2022. This changed in early 2023 with Sports Direct acquiring the 200,000sq ft former Debenhams premises on Henry Street for its new flagship store. New openings by Foot Locker (Ilac Centre), Dubray Books, HMV, Levi’s (all Henry Street), H&M and Flannels (both Clerys Quarter) will add significant impetus to the retail sector in the north inner city over the coming months.

Renewable Energy Transition Advances

Two proposed windfarm developments off the Dublin coast were successful bidders in the country's first ever auction to generate electricity from offshore wind. The Dublin Array on the Kish and Bray banks, and the North Irish Sea Array off Skerries, were allocated 824 megawatts (MW) and 500MW respectively in the May auction – enough to power an estimated 860,000 homes. The projects will now move forward to the planning phase.

Spencer Place Leads New Commercial Developments

April marked the opening of a new 413,000sq ft campus at Spencer Place. The campus comprises three grade-A office buildings, all of which are leased to Salesforce for its EMEA headquarters for a term of 15 years, and a 204-bedroom hotel which has been let to Dalata Hotel Group on a 35-year lease. The new campus is a significant development. Large developments of this nature have contributed towards a rising commercial vacancy rate in the Capital, according to CBRE. The overall vacancy rate was 13% in Q1, with grade A vacancy marginally lower at approximately 11%. Both rates were up significantly YoY though rents, shown in the chart, remain at peak levels.