The recovery of the service sector and high taxes point to a robust economy

The economically important services sector rebounded in January in the latest sign of an improvement in Ireland’s growth prospects.

According to the monthly AIB Ireland Services PMI, activity accelerated earlier in the year after declining for much of 2022.

The reading of 54.1 — a number above 50 indicates expansion — was the highest in four months and sustained an unbroken trend of growth that spanned almost two years.

The increased pace of activity in the services sector was largely due to a similar rise in new business, which grew at the fastest pace in three months, AIB said, citing survey participants saying an improvement in underlying demand was underway.

“There was a significant revival in the volume of new business in January, including new export business, which reflects an improvement in demand,” said AIB Chief Economist Oliver Mangan.

“This resulted in a significant increase in backlogs of pending deals, with signs of increasing capacity constraints. Employment continued to grow, albeit at a modest pace, amid signs of tight labor markets. Meanwhile, corporate confidence in the outlook for the next 12 months rose to the highest level since last February.”

January survey data also showed a “continued easing” in cost pressures, with average input prices rising at their slowest pace in 19 months. On the output side, sales prices rose more slowly than they had in 16 months.

However, energy prices and high labor costs are still a major source of cost pressure, and respondents said they continue to shift the burden to customers.

Transportation, tourism and leisure was the only subsector to decline over the month, posting a very weak performance of 40.1 – a trend going back six months.

Overall, the positive data supports an evolving positive narrative around the Irish economy, which is expected to avoid a recession this year after a strong end to 2022.

Earlier this week, Davy doubled his 2023 GDP forecast to 6.9 percent, while the IMF raised its forecast for the global economy for the first time in a year. The eurozone also narrowly avoided a contraction last year, partly on Ireland’s robust growth.

Public finances are starting 2023 stronger than even last year’s record tax revenues had caused it.

In January, government revenues were increased by 800 million euros in additional taxes paid compared to the same month last year. A further €300 million from the sale of AIB shares was also booked during the month.

The budget surplus of 2.8 billion euros in January compares to a surplus of 2.2 billion euros in the same month last year.

January is not typically a big month for corporate taxes – a major contributor to the state’s record tax revenues in recent years – so the figures reflect strong performances in income tax and sales tax, traditionally the state’s two biggest sources of revenue.

Strong income tax and VAT figures indicate the resilience of the so-called real economy, including spending over Christmas, and suggest Ireland has avoided a looming recession.

January’s better sales tax figure was partly due to a technical factor, officials said, but even taking that into account, the balance for the category rose by 400 million euros.