Ireland’s ties with US pose ‘notable downward risks’ to economy
Ireland’s deep economic ties to the US pose “notable downward risks” to the economy despite 3.4% GDP growth this year, according to the European Commission’s Spring economic forecast.
The report warns that further US tariffs on pharmaceuticals could dampen investment and cause “significant downside risks” with the economy “vulnerable” to further protectionist policies by the Trump administatration.
A weaker performance or a downsizing of the multinational corporate sector due to tariffs “would significantly affect tax revenues,” the forecast warns.
The outlook for corporate tax revenues is also “particularly uncertain, given their concentration among a relatively small number of large multinational companies” and the fact that the disproportionate amount of windfall taxes are “beyond what is explained by underlying domestic economic activity.”
Today’s forecast says Ireland’s “robust” growth at the start of 2024 was likely due to multinationals accelerating exports ahead of potential tariffs, the report adds.
Ireland’s GDP should grow by 3.4% this year and by 2.5% next year “supported by a strong labour market.”
The report says, however, that high uncertainty and the deterioration in global trading conditions are expected to detract from growth.
“Moreover, Ireland’s deep economic ties to the US pose notable downward risks in the context of rising protectionism,” it added.
It also said that the general government balance is forecast to remain in surplus, though significant risks arise from the uncertain outlook for corporate tax revenues.
The forecast says the Irish economy was in a strong position at the start of the year thanks to a rebound in exports in 2024 and improved domestic demand.
There were preliminary indications of 3.2% quarter-on-quarter growth in the first quarter of 2025, fuelled by the imminent tariff effect.
Overall the EU economy began 2025 on a stronger footing than anticipated and is projected to grow at a modest rate this year, with growth expected to pick up in 2026, “despite heightened global policy uncertainty and trade tensions”, the Commission said.
Real GDP growth is forecast to grow by 1.1% this year in the EU and 0.9% in the euro area.
Growth is expected to accelerate next year to 1.5% and 1.4% respectively.
The Commission also predicted that headline inflation in the euro area should slow from 2.4% in 2024 to an average of 2.1% this year, and 1.7% in 2026.
“Underpinned by a robust labour market and rising wages, growth is expected to continue in 2025, albeit at a moderate pace,” EU economy chief Valdis Dombrovskis said.
Trump has hit the European Union and others with 25% levies on steel, aluminium and car imports, and the bloc faces sweeping additional tariffs unless it reaches a deal with Washington.
The US leader announced a 20% levy on most EU goods in April, along with higher duties on dozens of other nations.
That measure has since been frozen until July to allow negotiations, but Trump has kept a “baseline” 10% tariff on imports from around the world, including the 27-country EU.
The EU also said Germany, the bloc’s biggest economy, would not grow at all in 2025, a significantly sharp reduction from the 0.7% predicted last year.
“The risks to the outlook remain tilted to the downside, so the EU must take decisive action to boost our competitiveness,” Dombrovskis said.
After a previous mandate focused on fighting climate change, the commission’s focus has pivoted to competitivity, seeking to make life for businesses easier in the face of fierce competition from Chinese and American firms.
Today’s forecast said that steady employment and real wage growth in Ireland will underpin private consumption although “elevated uncertainty is expected to keep household saving rates above pre-pandemic norms, tempering the pace of consumption growth.”
Investment declined sharply in 2024, largely due to intellectual property exports, while modified investment – which excludes the volatile intangible and aircraft leasing components – recorded modest growth.
Today’s report also highlighted the disproportionate size of the US pharma sector and the risks that entails.
“Exports rebounded strongly in 2024, largely driven by multinationals, with pharmaceutical trade surging and computer services remaining robust,” the forecast stated.
“While export growth is expected to continue, momentum is expected to moderate amid the imposition of tariffs and a weak external environment. Ireland’s openness and high trade and investment links to the US leaves it vulnerable to further protectionist policies,” it said.
“While the current US tariff exemptions – notably on pharmaceuticals – cover a large majority of Ireland’s goods exports to the US, the introduction of new tariffs, along with broader US policy changes to disincentivise investment and activity in Ireland present significant downside risks to Ireland’s economy,” the forecast concludes.
The forecast said that around half of the budget surplus last year was made up of the Apple back taxes windfall following the confirmation of the European Commission’s case against Ireland at the European Court of Justice (ECJ).
“Excluding this one-off transfer, the surplus amounted to 1.7% of GDP, as buoyant current revenue growth outpaced increases in public sector pay, investment and social transfers,” it said.
The surplus is expected to slip back to 0.7% this year, it added.
Inflation slowdown
Explaining the thinking behind today’s forecast, the EU also pointed to the US-China trade war during which the two sides hiked levies on each other’s goods before slashing them in a temporary de-escalation.
“The tariff rates eventually agreed by China and the US on 12 May have turned out to be lower than those assumed, but still high enough not to invalidate the assumption of a hit to the US-China trade relationship,” the commission said.
Beyond trade tensions, the EU warned the greater frequency of climate-related disasters such as forest fires and floods risked hurting economic growth.
The commission said it expected inflation in the 20-country single currency area to ease to 2.1% , unchanged from the previous prediction and very close to the European Central Bank’s (ECB) 2% target.
Inflation among the 20 members of the euro zone has slowed down sharply from the double-digit highs seen in late 2022 and sat at 2.2% in April.
The EU cut its 2026 inflation forecast to 1.7% from 1.9% but Brussels warned that further global trade tensions could “reignite inflationary pressures”.
Additional reporting from AFP
Article Source – Ireland’s ties with US pose ‘notable downward risks’ to economy – RTE