TECHNICAL RECESSION CONFIRMED BUT UNDERLYING PICTURE IS A LOT HEALTHIER
As part of our ‘Outlook 2024’ event in January, we outlined our house view that the Irish economy could continue to perform solidly in 2024 with lower inflation and lower interest rates features to particularly look to as we moved through the year.
Based on Q1’s economic events and data we continue to hold that view.
In GDP terms we now all know that the Irish economy moved into what economists call ‘technical recession’ in the second half of last year (consecutive quarters where the economy shrinks), with the CSO confirming in March that Irish GDP fell by 3.2% over the calendar year. However, as we discussed late last year in the piece ‘Recession or Boom, which is it for the Irish economy?’ GDP as a measure can often distort the underlying picture of the Irish economy which in our view remains a positive one.
STRONG LABOUR MARKET, PICKUP IN EXPORTS KEY HIGHLIGHTS OF Q1 2024
In terms of the labour market, employment again hit another all time high of 2.71 million in Q4 2023 with unemployment remaining low at 4.5% and wages growing year on year by 2.1% in Q4. In addition, the amounts Irish households continue to hold on deposit creeps higher and higher (now over €151 Billion and counting) while household debt continues to inch lower (88% of household disposable income in Q3 2023 compared with over 200% in 2011) and consumer confidence improves as inflation readings ease. Together this points to a resilient picture for consumer spending even in the face of continued cost of living challenges and the lagged impact of higher ECB interest rates (approximately 10% of Irish mortgages are set to roll off fixed mortgage rates onto likely higher ones in 2024).
Business investment indicators such as purchasing manager index (PMI) readings still largely echo international trends with the service sector growing consistently while the manufacturing sector ‘bobs’ between modest growth and modest declines.
On the trade side, interestingly we saw exports spike higher in February, a welcome change compared to the moves lower through most of 2023. Clearly one swallow doesn’t make a summer but if this trend were to continue it would certainly help arrest the trend of GDP downgrades we saw from last summer onwards.
Tax receipts (on a 12 month rolling basis) also appear to be still moving in a positive direction for both income tax and VAT in the early part of the year, again hinting at an underlying stability in the economy.
 |
 |
EARLY SIGNS OF STABILISATION IN ECONOMIC FORECASTS FOLLOWING DOWNGRADES IN 2023
All of this is culminating in little change in 2024 Irish economic forecasts in the first quarter of the year from bodies such as the ESRI and Central Bank. On the whole GDP growth expectations are in the order of 2-3% with consumer spending forecast to grow similarly.
 |
 |
EAGERLY AWAITED ECB PIVOT SHOULD BEGIN THIS SUMMER
Meanwhile on the inflation and interest rate front the news continues to be constructive. Irish inflation readings are still trending downwards with February headline inflation the lowest in around two and a half years. Indeed, the preliminary estimate for March inflation published earlier this week actually came in below 2%, a big plus.
Falling inflation readings are now very much the norm across the Euro area now, a factor in the ECB downgrading its 2024 inflation forecasts in early March (from 2.7% to 2.3%) and this should help interest rate cuts finally become a reality in the second half of the year. While interest rate forecasts have gyrated wildly over the past few months, investors are now expecting four interest rate cuts of 0.25% in 2024 – moves which feel appropriate and are now being increasingly discussed publicly by ECB Governing Council members.
 |
 |
THE REPRICING ‘JOURNEY’ FOR IRISH CRE MAY NOT BE FULLY OVER BUT IS WELL PROGRESSED
As regards the trajectory for the real estate market, at the beginning of the year we highlighted that an ECB pivot was central to the Irish real estate market stabilising – so it’s still a case of “so far so good” on that front. As we also outlined then, the repricing of Irish real estate assets from 2022 onwards tended to begin slightly after core European markets. Therefore, it is still possible that we see further modest moves higher in Irish CRE yields in the early part of 2024 and that values ultimately bottom out late towards year end or even in early 2025, again a little later than we anticipate for core European markets.
However, the continued positive trajectory for the economy together with the growing likelihood of interest rate cuts still supports our view that while the repricing journey for Irish commercial real estate may not be fully over it seems well progressed.
