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GDP surged by 9.7% in Q1 off the back of a surge in goods exports and strong investment as firms tried to get ahead of the imposition of US tariffs in April. While tariff front-running means Q1’s GDP figure somewhat overstates the economy’s strength, modified domestic demand (MDD) still grew by 0.8%, suggesting the underlying economy remains on a stable footing. However, the economy faces several headwinds going into Q2. As front-running unwinds, and uncertainty weighs on consumer confidence and business investment, growth will slow later this year.
Growth dominated by trade and multinationals, but underlying economy still resilient
GDP grew strongly in Q1, largely due to trade. Net exports grew by 12.4% on the quarter thanks to a rush of goods exports as firms raced to beat Trump’s tariffs. Investment, which is particularly volatile, also grew by a whopping 41.1%. This mostly reflected investment in intangible assets. Both trade and investment figures almost certainly point to firms, particularly multinationals, front-running US tariffs before April.
Looking behind the headline data, the domestic economy, as measured by MDD, grew by 0.8% in Q1. All three components of MDD grew, but most importantly consumption (+0.6%) and government spending (+0.7%) rose, which suggests the economy had underlying momentum heading into the tariff storm. Investment also helped, growing by 1.5%.
Tariff and uncertainty likely to lead to slower growth ahead
Despite the economy remaining on a solid footing throughout Q1, we do expect the economy to slow in Q2. There are three reasons why.
First, exports surged in Q1, which was almost entirely driven by goods exports to the US as firms rushed to beat tariffs. In particular, pharmaceutical exports drove the surge. This trend is likely to wane in Q2 as logistical issues and products’ finite shelf-lives mean US firms will eventually struggle to stockpile more. As this uptick unwinds in Q2, we expect trade to drag on growth.
Second, Ireland is far more exposed to US tariffs than other nations due to the presence of US multinationals and strong trade links. That means the current tariff arrangement is likely to start to bite later this year. But for now, the worst-case scenario, which includes sector-specific tariffs on areas such as pharmaceuticals, seems to have been avoided.
Third, uncertainty, such as that around sector-specific and other tariffs, will weigh on activity. The US administration threatened tariffs as high as 50% on the EU, which will keep firms and consumers guessing and damage confidence until the picture becomes clearer. It now looks likely that the pervasive uncertainty seen in April and May continues, which will weigh on business investment and consumer spending.
The good news is that the Irish economy has significantly outperformed its European peers in recent years and seen MDD grow at levels similar to the US economy. The solid fundamentals of a strong labour market and continued wage growth should help to keep the domestic economy on firm foundations despite Trump’s tariffs and any threat to double-down on them in the months ahead.
Ultimately, we now expect MDD growth of around 2.5% this year, down from 3% previously. Risks are clearly weighted to the downside: bigger tariffs on the EU, retaliatory measures and pharmaceutical-specific tariffs would all be especially damaging to the Irish economy.
