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The labour market remained strong in Q1, despite an increase in the unemployment rate to 4.3%. Employment recovered from a slight drop off in Q4 last year and labour force participation has been ticking up. However, Q1 was a long time ago and the shock of US tariffs and the associated uncertainty will depress employment growth this year and lead to a looser labour market.
Strong employment growth on the year
Labour market data for Q1 suggests employment increased by 3.3% in the year to Q1. A growing labour force over the past couple of years has supported economic growth while keeping the unemployment rate relatively stable. It has also helped the labour market to avoid overheating while Ireland’s economy outperformed its European peers.
Additionally, both the participation (+0.8ppts) and employment rates (+0.9ppts) have edged up on the year. The participation rate is now at 65.8%. This is well above its long-term average of 63%, which suggests there isn’t a great deal of scope to draw many more inactive people into the workforce. Furthermore, the number of people who defined themselves as underemployed and wanted to work more hours remains stable at 131,300, which is in line with the two-year average. This all speaks to a very tight labour market. These factors will continue to put upwards pressure on wage growth, which is already strong at 5.6% y/y, and further push up inflation.
Economy likely to slow in Q2
The labour market clearly held up in Q1. We also know goods exports to the US surged nearly 400% y/y in March. This suggests economic growth will be strong in Q1, but we think that will unwind in Q2. Even if pharmaceuticals firms try to keep front-running sector-specific tariffs, exports should fall in the second quarter as logistical constraints kick in. What’s more, Trump’s 10% universal tariff and other sector-specific tariffs will still be a headwind to the economy, even if the worst-case scenario seems to have been avoided for now.
While Ireland is the most heavily exposed member of the European Union to Trump’s tariffs, it has also performed far better over recent years. It means the labour market and the Irish economy will be able to face the tariff storm from a much stronger base than most other economies.
Ultimately, the labour market held up well in Q1 before Trump’s tariff turmoil started to weigh on the economy. We expect the current tariff regime and the associated uncertainty to impact growth later this year. This is likely to lead to more slack in the Irish labour market, which would help to dampen inflation through lower wage growth.
