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Ireland’s labour market held firm in Q2 despite the jump in uncertainty due to US tariffs. Employment growth remains strong, while the rising unemployment rate has more to do with a rapidly growing labour force than it does any genuine weakness. We suspect the labour market will weaken in Q3 as the impact of a US-EU “trade deal” takes hold. This will help put downwards pressure on pay growth, which could reduce the risk of a resurgence in inflation later this year.
Labour market remains robust
Strong employment growth (+2.3% y/y), enabled by a rapid rise in the labour force, has continued to support economic growth over the last couple of years. Indeed, in the past year, employment has risen by 63,900, while the labour force has grown by 73,500. This has helped to ensure the labour market doesn’t overheat while growth remains strong.
What’s more, the participation rate rose to 66.4% from 66.0% in Q2 2024. This suggests around a third of the increase in the labour force over the past year is due to rising participation.
While this will support the public finances and help ensure that labour supply keeps up with demand, the measure is well above it’s long-run average of 63% and may not have much further to run. This could lead to a further tightening in the labour market were this trend to reverse.
On a quarterly basis, there was little evidence that tariffs had caused a slowdown in the labour market. The seasonally adjusted unemployment rate, which allows for comparison between quarters, rose to 4.6% in Q2 from 4.5% in Q1.
This all speaks to a very tight labour market. Given that pay growth was 5.6% in Q1, we think the labour market would need more material loosening to bring pay growth down. Persistent strong pay growth could mean inflationary pressures build in the economy throughout the rest of the year.
Tariffs likely to dampen labour market in H2
Granted, strong real-pay growth will help support the domestic economy in H2, but there is now a clear risk that US tariffs on the EU will weaken growth and therefore the labour market in H2.
There is now at least some more certainty on tariffs on the crucial pharmaceutical sector, so we don’t think the economy is heading for a cliff edge. However, growth will be a long way off the lofty highs of Q1 when tariff front-running caused activity to surge 7.4% Q/Q. This will slow employment growth.
All told, we think the labour market was surprisingly resilient to external shocks in Q2 and see few signs that tariffs have prompted a rapid weakening in the labour market. Admittedly, slower global growth and a 15% tariff on EU exports to the US will weigh on the economy in Q3, but the economy is in a good place to brave the storm thanks to strong public finances, growth and a robust labour market.
