Latest / AIB Market Talk / Confidence, Caution, or a Mixture of Both? The AIB Irish Economic Outlook - October 2026

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Confidence, Caution, or a Mixture of Both? The AIB Irish Economic Outlook - October 2026 · AIB Market Talk

• 0:02
  SPEAKER_00: You're listening to AIB Market Talk, bringing you financial market insights from AIB's experts.
• 0:10
  SPEAKER_01: Hello and welcome to today's podcast, which we are recording ahead of our latest and semi-annual publication on the Outlook for the Irish economy, which will be published and available on Thursday this week.
• 0:21
  SPEAKER_01: On that, I am joined today by our chief economist, David McNamara, to discuss themes our listeners will certainly be familiar with inflation, geopolitical uncertainty, and their impact.
• 0:30
  SPEAKER_01: But also the good news that we are expecting Ireland to remain resilient and in fact continue to grow.
• 0:35
  SPEAKER_01: David, thank you for joining me.
• 0:36
  SPEAKER_02: Thanks, Jane.
• 0:37
  SPEAKER_01: And David, before we break down the components individually, then what is the main message our listeners should take?
• 0:42
  SPEAKER_01: And the good, the bad, and the ugly, if you will.
• 0:44
  SPEAKER_02: I think the we start with the bad then, uh, and then we'll come back to the good.
• 0:48
  SPEAKER_02: The bad is is really heightened uncertainty.
• 0:50
  SPEAKER_02: And we're seeing this reflected in the price of oil, you know, trending towards$120 a barrel once again.
• 0:57
  SPEAKER_02: I think it's before we started today, I checked it was around$116.
• 1:01
  SPEAKER_02: That is a significant uplift, and that will be felt quickly in consumer prices, particularly the price of petrol and diesel.
• 1:09
  SPEAKER_02: So that's the bad news.
• 1:10
  SPEAKER_02: Geopolitical uncertainty is here and it's it's probably here to stay.
• 1:14
  SPEAKER_02: And we have to reflect that into our forecasts.
• 1:16
  SPEAKER_02: And so it could get uglier before it gets better.
• 1:19
  SPEAKER_02: And that's the risk uh that we're dealing with.
• 1:22
  SPEAKER_02: The good news overall is actually the global economy has weathered this shock pretty well so far.
• 1:28
  SPEAKER_02: That's not to be complacent about what's might happen in the future.
• 1:32
  SPEAKER_02: It's weathered it because of two factors.
• 1:36
  SPEAKER_02: Number one, balance sheets globally typically, uh, but especially in Ireland, are in a good place.
• 1:42
  SPEAKER_02: So there's very little debt in the Irish household sector, for example.
• 1:46
  SPEAKER_02: People have a lot of savings that they can use to offset the shock.
• 1:49
  SPEAKER_02: We're not happy about it by any means, having to pay more for oil and gas.
• 1:52
  SPEAKER_02: So balance sheets are in a stronger position in some countries, but you are seeing that risk materialize in countries like France and the UK, where we're seeing sharply rising bond yields because balance sheets are in a weak position.
• 2:05
  SPEAKER_02: So there's cross currents there.
• 2:06
  SPEAKER_02: And then finally, actually, offsetting some of this shock from energy is the AI story.
• 2:11
  SPEAKER_02: Uh now we could have a long debate about how durable that is, but there's an investment boom happening globally.
• 2:17
  SPEAKER_02: It's happening everywhere, including Ireland and Europe.
• 2:20
  SPEAKER_02: And that is actually boosting growth at the minute.
• 2:22
  SPEAKER_02: So it's kind of there's cross currents at the minute.
• 2:24
  SPEAKER_02: There's some up, some down, but the net effect is actually the global economy has performed pretty well so far this year.
• 2:31
  SPEAKER_01: Um I might circle back to AI, David, a little bit more uh further into the pod.
• 2:36
  SPEAKER_01: But bringing it back then, modified domestic demand, it's forecast to grow according to your report.
• 2:43
  SPEAKER_01: What growth are you seeing and what do you see driving it?
• 2:46
  SPEAKER_02: So MDD is our measure of what's happening domestically in most of the sectors that we all work in.
• 2:52
  SPEAKER_02: GDP is what you compare other us to other countries based on, but GDP in Ireland is so volatile because it's impacted by a couple of very, very large US companies.
• 3:02
  SPEAKER_02: So we like to look at MDD, as it's called, to give a give a gauge of what's happening domestically.
• 3:07
  SPEAKER_02: We do see a slowdown this year.
• 3:09
  SPEAKER_02: So last year, MDD was growing at something like 4.7%.
• 3:12
  SPEAKER_02: We see that slowing this year to 3.8 and 3% in 2027.
• 3:17
  SPEAKER_02: That's still very robust growth in a European context when you look at European, a European economy as a whole struggling to grow at 1% per annum.
• 3:25
  SPEAKER_02: So very strong.
• 3:27
  SPEAKER_02: What's underlying that?
• 3:28
  SPEAKER_02: We do see weaker consumer spending growth slowing from around 2.5% towards two next year.
• 3:34
  SPEAKER_02: That's because of inflation.
• 3:35
  SPEAKER_02: People have less money to spend, or their spending power is diminished by inflation.
• 3:40
  SPEAKER_02: But investment is strong.
• 3:42
  SPEAKER_02: Exports are strong because of the AI story.
• 3:45
  SPEAKER_02: Also, pharma and and and tech services are continue to be strong.
• 3:50
  SPEAKER_02: Um, but investment on the ground in Ireland related to AI and things like data centers and other infrastructure, as well as the investment by companies in deploying the technology, is already boosting Irish growth domestically.
• 4:04
  SPEAKER_02: And we expect it will continue to do so over the next year or so.
• 4:07
  SPEAKER_02: Now, we don't predict beyond that because I think there's a lot of uncertainty, and we're seeing that uncertainty drive, for example, equity prices in markets right now.
• 4:16
  SPEAKER_02: There was pretty lofty valuations priced in for the hyperscalers and other companies in that AI universe, and we're starting to see markets take a second look and maybe reprice some of those fairly buoyant expectations.
• 4:30
  SPEAKER_02: So that could have a very real impact on how durable this investment boom is.
• 4:34
  SPEAKER_02: Because if you know, if markets begin to price in something different, then that investment boom may not necessarily come through to the same extent beyond next year and the year after.
• 4:43
  SPEAKER_01: Bringing it back to the cost of living, and you mentioned oil at$116 a barrel there this morning.
• 4:49
  SPEAKER_01: Your report forecasts that inflation will rise further again.
• 4:52
  SPEAKER_01: And some of that based on higher oil and gas.
• 4:56
  SPEAKER_01: Is that on the expectation that oil and gas has peaked at these levels, or what are you looking at down the road for that?
• 5:03
  SPEAKER_02: Yeah, so we have to be upfront in this and that we have to make assumptions at a point in time for oil prices.
• 5:07
  SPEAKER_02: So we do um expect that the peak will come towards the end of this year with a gradual fall in oil and gas prices throughout next year, but it will remain elevated throughout much of next year.
• 5:18
  SPEAKER_02: So the impact on inflation is that we think inflation um will average this year around 3.5%, but will peak between four and five percent uh towards the end of this year.
• 5:29
  SPEAKER_02: And inflation will remain elevated next year, over three percent in Ireland next year, uh, compared to a 2% target that's the ECB sets, and then only then, only getting back to kind of 2% normal rate of inflation in 2028.
• 5:43
  SPEAKER_02: So this is a two-year-long shock, and it will have an impact on people's spending power, people's disposable income, because you know, if wages are right now are growing at around 4%, um, a little bit less actually.
• 5:57
  SPEAKER_02: So if you're looking at inflation growing at 4% to 5%, right now people are experiencing real wage decline.
• 6:03
  SPEAKER_02: So it's for that reason that we expect that consumer spending will be weaker in terms of the growth.
• 6:08
  SPEAKER_02: It won't, it won't contract, but the growth rate will be weaker this year, next year, because inflation is higher.
• 6:14
  SPEAKER_01: As a matter of interest, David, on that, when you talk about a two-year cycle, is that allowing for the current prices and the current crises and disruption that we're seeing coming to an end in the nearer term, or what kind of time frame do you have around that?
• 6:30
  SPEAKER_02: Yeah, so this is in you know, it's it's almost impossible to predict, but we think there's a long tail, call it of the current conflicts in the Middle East and other areas.
• 6:39
  SPEAKER_02: And so we think that prolongs itself into 2027.
• 6:43
  SPEAKER_02: But what typically happens with oil markets is you have the initial shock, you may have subsequent shocks, but they're lesser than the initial shock because a couple of things happen.
• 6:53
  SPEAKER_02: Number one, there's demand destruction, and you're seeing this across many countries across the world where people reduce their consumption of oil because the price is too high.
• 7:00
  SPEAKER_02: It's classic supply and demand.
• 7:02
  SPEAKER_02: And that's that's been felt today.
• 7:04
  SPEAKER_02: So that that is a self-writing mechanism for prices eventually.
• 7:08
  SPEAKER_02: It takes a while to come through.
• 7:10
  SPEAKER_02: But uh number two, we've also seen oil supply increase.
• 7:13
  SPEAKER_02: So when the price goes up, that makes uh oil, some oil wells more economical than they previously were.
• 7:19
  SPEAKER_02: And we're seeing producers actually increase their output uh in a context of high oil prices, particularly in the US.
• 7:25
  SPEAKER_02: So those uh mechanisms are eventually they're self, you know, they're self-righting.
• 7:30
  SPEAKER_02: So they eventually drag down oil prices.
• 7:32
  SPEAKER_02: But as we said in the piece, this will take time.
• 7:35
  SPEAKER_02: And we in our risks section, we talk about how, you know, there's very much the risks are on inflation, very much the upside, which implies that there's downside risks to growth as well.
• 7:45
  SPEAKER_01: But the report, as you say, they're at four and a half percent, it's expected to peak in quarter four.
• 7:50
  SPEAKER_02: Around that twenty six.
• 7:51
  SPEAKER_02: And that and we were very clear when we lay out our assumptions for oil prices.
• 7:54
  SPEAKER_02: So it could be could be above that, could be below that.
• 7:56
  SPEAKER_02: But our best estimate right now is that we'll see a peak at the end of this year, around the turn of the year at 2027.
• 8:02
  SPEAKER_01: Um, you mentioned it just uh when we were talking, actually, and on a positive note as well, the labour market does continue to grow at a slower pace, but it is still growing.
• 8:11
  SPEAKER_01: Now we can't talk about it either without talking about AI, but take us through the headlines first before we get on to AI.
• 8:17
  SPEAKER_02: Yeah, the labour market has been strong, but it's not as strong as it once was.
• 8:21
  SPEAKER_02: Like, if the context here is we've the number of people working in this economy in Ireland has increased by over 460,000 odd people in the last six years, 20% more people at work.
• 8:32
  SPEAKER_02: Like the gains have been phenomenal.
• 8:34
  SPEAKER_02: So they could could never continue at that pace.
• 8:35
  SPEAKER_02: And we're seeing that slowdown.
• 8:37
  SPEAKER_02: Now, there's been some speculation that it's caused by AI.
• 8:40
  SPEAKER_02: I'm not so sure that's a factor, to be honest.
• 8:43
  SPEAKER_02: There are certainly pockets of the labour market which have seen declines.
• 8:48
  SPEAKER_02: Take tech, for example.
• 8:49
  SPEAKER_02: We've seen an outright decline in the number of jobs in tech in the last year.
• 8:53
  SPEAKER_02: Now, if you look at various measures, there's kind of a disagreement in terms of, you know, or there's a discrepancy in terms of how, you know, how big that fall has been.
• 9:03
  SPEAKER_02: But it looks like there has been a bit of a shakeout or you know, lot job losses in the tech sector.
• 9:08
  SPEAKER_02: Is that due to AI?
• 9:09
  SPEAKER_02: Maybe.
• 9:10
  SPEAKER_02: But that sector also grew very rapidly post-COVID.
• 9:13
  SPEAKER_02: And potentially there's a right sizing as much as AI at play there.
• 9:17
  SPEAKER_02: And if you look at some of the evidence today, it suggests that the kind of job apocalypse or the collapse in jobs because of AI, it hasn't come through yet.
• 9:27
  SPEAKER_02: And actually, AI is proving more complementary because actually you need humans to check and to you know to provide that kind of those risk assessments of AI and agents and AI agents and all that stuff.
• 9:39
  SPEAKER_02: And if you look at some of the the latest jobs data, like for example, on Indeed, we quote this in our piece the number of jobs listed on the Indeed recruitment platform, between 14 and 15 percent of them in Ireland mention AI terms, which suggests that actually AI is more complementary than replacing jobs.
• 9:57
  SPEAKER_02: But we could be here in a year's time, Jane, and things might have changed.
• 10:00
  SPEAKER_02: Like the technology is rapidly changing.
• 10:03
  SPEAKER_01: Different conversation again.
• 10:04
  SPEAKER_01: The the report mentions 1.2% job growth in 26, um, David, but then going up to 2% in 2027.
• 10:12
  SPEAKER_01: Well, it was a drop, as you mentioned, in 2026.
• 10:15
  SPEAKER_01: What is causing that specific drop in 2026 figure?
• 10:20
  SPEAKER_02: Yeah, it's it's you're you're seeing declines across services sectors like tech.
• 10:24
  SPEAKER_02: I mentioned already.
• 10:25
  SPEAKER_02: You you've seen some less hiring uh in public sectors, such as, like, for example, health and social care, which have been rapidly growing their numbers.
• 10:32
  SPEAKER_02: There does seem to be like a constraint on that now.
• 10:36
  SPEAKER_02: And so we have uh jobs growth slowing to 1.2% this year.
• 10:40
  SPEAKER_02: I think in reality, jobs growth is stronger.
• 10:42
  SPEAKER_02: We have to forecast based on the official measure.
• 10:45
  SPEAKER_02: I think there's some issues with how the data and the methodology captures the number the level of jobs growth.
• 10:50
  SPEAKER_02: If you look at payroll jobs growth, which is basically comes from the revenue services, all of it it's captured from the taxes that we pay in terms of PAYE.
• 11:01
  SPEAKER_02: That suggests jobs growth is around 2% at present.
• 11:04
  SPEAKER_02: Um, so we we talk about that in the piece in that the official measure says one thing, but actually other administered or real-time-based measures suggest that actually the jobs uh market is a little bit stronger than what the official data suggests.
• 11:18
  SPEAKER_02: But so without getting into the weeds, things are a little bit softer, but I don't think they're quite as bad as the official data suggest.
• 11:25
  SPEAKER_01: And it's very interesting what you what you mentioned about AI there, not necessarily replacing jobs, but being being a positive um angle to it.
• 11:34
  SPEAKER_01: Now we have to stay with AI because we can't avoid that proverbial elephant in the room.
• 11:39
  SPEAKER_01: But talking about AI investment, it is supporting Ireland's economy.
• 11:46
  SPEAKER_01: You might expand on its importance to the wider economic story that's out there.
• 11:50
  SPEAKER_01: I know you talk a little bit about it, but just to get further under the bonnet on it.
• 11:53
  SPEAKER_02: Yeah, so in the in the report, we talk about like the tangible impact and the intangible impact.
• 11:58
  SPEAKER_02: And most economies in the world are benefiting from one or the other.
• 12:01
  SPEAKER_02: So the tangible impact is, for example, the uh the chip manufacturers in Asia and Taiwan and other regions manufacturing it at a rate of knots and exporting those chips to other countries.
• 12:12
  SPEAKER_02: And then on the intangible is the businesses investing in the software.
• 12:16
  SPEAKER_02: So, like in Ireland, you know, firms across the board will be investing in some sort of AI platform.
• 12:22
  SPEAKER_02: And whether that's you know proving to be as useful or not, you know, the jury's out, and we'll see in terms of uh how that plays out in the next few years.
• 12:30
  SPEAKER_02: But Ireland actually is benefiting from both, and it's actually through a few channels.
• 12:35
  SPEAKER_02: So we have obviously we have businesses in Ireland who are investing in AI technology.
• 12:40
  SPEAKER_02: We also have a chip or a semiconductor industry in Ireland, which is benefiting by increased sales, and so that's reflected in our exports.
• 12:50
  SPEAKER_02: And then we also have a very large uh industry of or yeah, yeah, call it an industry of data centers in Ireland, existing data centers.
• 12:57
  SPEAKER_02: Now, there are plans to increase those, which will be challenging given the grid uh constraints for electricity, but those data existing data centers need to be re-kitted out, and and we're seeing that reflected in the in the GDP and the investment numbers with the latest chip technology.
• 13:13
  SPEAKER_02: So we're we're pulling in imports from those East Asian producers, and we're investing in our data centers in Ireland, and that boosts our MDD.
• 13:21
  SPEAKER_02: So it's not just a GDP story.
• 13:23
  SPEAKER_02: And so Ireland is benefiting from both channels, intangible and the tangible, where in most countries are one or the other.
• 13:29
  SPEAKER_01: David, that kind of leads me nicely then into a discussion around public finances, you know, and we covered a lot of this in our budget 27 pod earlier in the month.
• 13:37
  SPEAKER_01: But while they're very positive, they are hugely reliant on windfall corporate tax receipts, aren't they?
• 13:45
  SPEAKER_02: Yeah, for sure.
• 13:45
  SPEAKER_02: And we we wrote this in our piece um and we talked about it in our post-budget podcast.
• 13:50
  SPEAKER_02: We did um increasingly reliant on corporation taxes.
• 13:54
  SPEAKER_02: And actually, related to AI, we are starting to see you know the establishment of offices by the big AI players, like for example, OpenAI and Anthropic, are now opening offices in Dublin.
• 14:05
  SPEAKER_02: So, how that plays out over the future, are they going to be reporting revenues in Dublin?
• 14:10
  SPEAKER_02: I assume they will.
• 14:11
  SPEAKER_02: Will that boost our corporation taxes?
• 14:13
  SPEAKER_02: Today, our corporation taxes are being boosted by the traditional tech players that we we all know that are exist here, but also the pharma companies who've been here for a very long period of time.
• 14:23
  SPEAKER_02: And so, you know, the the forecasts that have been produced in a given year by the Department of Finance have usually been fairly conservative on corporation taxes.
• 14:31
  SPEAKER_02: And they were benefiting in terms of huge surpluses, and that makes a real difference.
• 14:37
  SPEAKER_02: We're running a surplus, one of the few countries in Europe to do so.
• 14:40
  SPEAKER_02: And in the current wave of, we'll talk about it later, of rising bond yields, we've actually been insulated because we're running a very large surplus.
• 14:49
  SPEAKER_02: Our debt is low, and compares to a France or in Italy, we're in a much stronger position.
• 14:54
  SPEAKER_02: But underneath the surface, um, if you know one company were to get into difficulty or maybe to move their headquarters or redesign their balance sheet, you know, you could see a sharp reduction in corporation taxes.
• 15:06
  SPEAKER_02: We've been talking about this, the Fiscal Advisory Council, the central bank, everyone are saying we should be putting more away for a rainy day.
• 15:12
  SPEAKER_02: And to the government's credit, they are doing that.
• 15:14
  SPEAKER_02: We have sovereign wealth funds now established and they'll be up to nearly 30 billion next year, but we could be going faster um to build up those buffers because the next shock will inevitably come along very shortly.
• 15:26
  SPEAKER_01: Yeah, as I read in the report, um, as I say, I think the the budget surplus, I think you mentioned, is 9.5 billion euros.
• 15:33
  SPEAKER_01: But without that corporate tax windfalls that we're looking at, we'd be running along the lines of a 20 billion deficit.
• 15:40
  SPEAKER_02: Yeah, so it's nine and a half billion next year of a surplus.
• 15:43
  SPEAKER_02: And then uh over time the underlying deficit, excluding the corporation taxes, could get to 20 billion by the end of the decade.
• 15:49
  SPEAKER_02: And that's quite startling, isn't it?
• 15:51
  SPEAKER_02: Yeah, yeah.
• 15:51
  SPEAKER_02: About two to three percent of the economy.
• 15:53
  SPEAKER_02: So it it puts us very much in the middle of the European pack rather than top of the pack in terms of our our fiscal metrics.
• 16:00
  SPEAKER_02: But look at the corporation taxes are probably likely to go higher before they go lower because these companies are performing very well and we're we're very much exposed to a rising tide globally of number one, obviously AI and technology, but also you know, the weight loss drug phenomenon in the in the pharmaceutical sector, alongside other blockbuster drugs that are produced here are produced in part here, and we're benefiting from the companies that are based here, but also how those companies structured their balance sheet and their IP.
• 16:28
  SPEAKER_02: And that's that's driving huge revenue growth for these companies.
• 16:31
  SPEAKER_02: And we've benefited from that, but we can't rely on it forever.
• 16:34
  SPEAKER_01: Yeah.
• 16:35
  SPEAKER_01: Before we move on to the hot topic of uh bond markets, just to finish off on your findings, housing, David, where what were your findings in the housing side a bit?
• 16:44
  SPEAKER_02: Not much of a change from what we had last time.
• 16:46
  SPEAKER_02: We are expecting an uplift in housing supply this year to new supply to 39,000 units from 36 last year.
• 16:55
  SPEAKER_02: We did worry at the start of the year that you know the impact of higher prices and inflation and higher interest rates might dampen that.
• 17:01
  SPEAKER_02: But actually, the indicators we've seen so far this year have been very encouraging.
• 17:05
  SPEAKER_02: You know, uh start housing starts are up, planning permissions.
• 17:09
  SPEAKER_02: So we think 39 this year is a good estimate, rising more slowly next year because the impact of inflation to 41 and then up to around 45 by 2028.
• 17:21
  SPEAKER_01: That's great.
• 17:22
  SPEAKER_01: Um lastly, David, we need to discuss the bond markets, and they really have been a hot topic.
• 17:28
  SPEAKER_01: And I think they have uh they own a section of its own in this in this report uh that you have.
• 17:34
  SPEAKER_01: You might bring it back to the beginning, bring it back to basics, might share with our listeners why have government bannies risen so sharply.
• 17:41
  SPEAKER_02: And I should start by giving the credit on this section is to my colleague Dan, who's been working on this and uh has has uh written a really interesting piece for uh this article.
• 17:50
  SPEAKER_02: Uh, it's called The Long and the Short of It.
• 17:53
  SPEAKER_02: In terms of the short end of the curve, very much driven by inflation, central banks turning very hawkish, they're very worried about you know getting behind the curve like they did last time, uh and and markets are pricing in a lot of uh interest rate hikes.
• 18:07
  SPEAKER_02: Now, I am conscious we are recording this before this the next set of central bank meetings.
• 18:11
  SPEAKER_02: So the Fed is on Wednesday night, the ECB and the Bank of England on Thursday.
• 18:15
  SPEAKER_02: Um, Bank of England are expected to move.
• 18:18
  SPEAKER_02: They haven't hiked yet.
• 18:19
  SPEAKER_02: Um, the Fed and the ECB are more in the balance.
• 18:22
  SPEAKER_02: You know, let's not have a hostage to fortune, but it's you know, it's unlikely maybe that the Fed and ECB might move right now.
• 18:29
  SPEAKER_02: They might decide to move in December.
• 18:30
  SPEAKER_02: They've already hiked earlier this year.
• 18:32
  SPEAKER_02: So, like what's priced in is very much driving the front end of the curve, particularly around two-year swap rates, you know, materially higher than they were at the start of the year.
• 18:41
  SPEAKER_02: That's the war.
• 18:42
  SPEAKER_02: What's interesting though is what that means for the long end of the curve and what it means for fiscal sustainability.
• 18:48
  SPEAKER_02: The countries right now who have run the larger deficits and have a larger debt pile are suffering more from this current inflationary shock than others.
• 18:56
  SPEAKER_02: You know, so for example, take Germany and France, both experience oil prices to the same extent.
• 19:02
  SPEAKER_02: Both are heavily reliant on oil prices to power their industry.
• 19:06
  SPEAKER_02: German bondos are around 3.5%, and France is above five.
• 19:11
  SPEAKER_02: France has a much larger fiscal deficit and has shown a lack of institutional, let's call it, rigor in terms of its ability for the parliament to pass a budget, even.
• 19:22
  SPEAKER_02: It's got a very split political system.
• 19:24
  SPEAKER_02: Germany has its issues as well, but it's been traditionally a much more uh frugally run economy or at least a budget.
• 19:31
  SPEAKER_02: Um the bond markets are pricing in different risks, and France is very much at the top of that risk pile alongside the other countries like the UK, who have also very large deficits, and there is a budget this week in the UK.
• 19:43
  SPEAKER_02: But it does look like the UK system at least, you know, the the government there has a majority and it will probably announce a plan to reduce that deficit over time.
• 19:53
  SPEAKER_02: Whereas France has not, and you can see the spread has widened significantly, like the spread from France to Germany is beyond, well beyond what even Italy is.
• 20:02
  SPEAKER_02: Now, the question here, the interesting question is does the ECB step in in some way?
• 20:06
  SPEAKER_02: You know, it does have instruments that it hasn't used or that it could potentially use in order to call it cap yields, and that would be seen as the ECB becoming quite politicized, particularly with a French president at the helm.
• 20:18
  SPEAKER_02: So these are all the interesting kind of subplots, but at the long end of the curve, it's very much driven by fiscal deficits, but also central banks are reducing, you know, QE has turned to QT.
• 20:28
  SPEAKER_02: So central banks are no longer purchasing bonds, and we have we talk about that in the piece.
• 20:32
  SPEAKER_02: And so the buyers of bonds are more price sensitive, call it.
• 20:36
  SPEAKER_02: They're your typical funds, mutual funds, hedge funds, who are much more sensitive uh to uh to interest rate rises and are expecting or are pricing in a bigger risk premium for these sovereigns like France.
• 20:48
  SPEAKER_01: It's it's interesting.
• 20:49
  SPEAKER_01: Your team have talked uh in all the pods and different publications over the course of the last year with regard to how is it that Ireland are faring better now than they did back in, say, 2022.
• 21:00
  SPEAKER_01: And you have always quoted the fact that financially we are far more stable.
• 21:04
  SPEAKER_01: And I suppose that manifests, or we're seeing that in terms of those bond yields that you mentioned.
• 21:09
  SPEAKER_01: I think you've mentioned the French tenure uh yields of 5%, which is as high as level since 2002.
• 21:16
  SPEAKER_00: Yep.
• 21:16
  SPEAKER_01: And the spread between it and the German equivalent, which is getting a lot of headlines at the minute, is currently around 170 basis points.
• 21:23
  SPEAKER_01: But Ireland from Germany is only 13 basis points, which I guess that's coming from our good financial fiscal situation.
• 21:30
  SPEAKER_01: And we have we don't have an election coming up, we don't have what's going on in France to deal with.
• 21:35
  SPEAKER_02: Yeah, exactly.
• 21:36
  SPEAKER_02: Boring is good, right?
• 21:37
  SPEAKER_02: So, you know, um like the credit rating agencies have upgraded Ireland successively over the past few years.
• 21:43
  SPEAKER_02: The political system is seen to be fairly stable and fairly boring, and it's a long way from where we were 15 years ago.
• 21:49
  SPEAKER_02: We were the poster child of you know bad uh fiscal policy 15 years ago, and we got our house in order.
• 21:55
  SPEAKER_02: And it's interesting actually that the the countries that went into uh bailout programs like.
• 22:00
  SPEAKER_02: Portugal, Greece are now the ones that are performing quite well in terms of their fiscal situation.
• 22:04
  SPEAKER_02: They had to go through painful restructuring, and we can all remember that.
• 22:09
  SPEAKER_02: And so and we've had the kicker of obviously the corporation taxes.
• 22:12
  SPEAKER_02: So our debt profile is on a falling profile.
• 22:15
  SPEAKER_02: Our debt to GDP, it's going to be our debt to G and I star will be down to around 30 to 40% over the next few years.
• 22:21
  SPEAKER_02: Compare that to France, where they're running 120% of GDP.
• 22:25
  SPEAKER_02: So it's just a different universe.
• 22:27
  SPEAKER_02: So that's why we keep saying, and it's you know, boy who cried Wolfsos, that we need to be thinking, you know, the current corporation tax revenues are like an oil.
• 22:34
  SPEAKER_02: We've we've struck oil, and we're like, we should treat it like Norway did with their sovereign wealth fund.
• 22:39
  SPEAKER_02: Um they made huge revenues from their oil and gas in the North Sea, but they squirrel most of that away into their sovereign wealth funds in order to pay for the kind of future liabilities, pension liabilities, aging demographics, all the costs that we know will come through in the next 20 years.
• 22:55
  SPEAKER_02: We need to be putting money away for it now.
• 22:57
  SPEAKER_02: And we are doing that, but we just need to go a little bit faster.
• 23:00
  SPEAKER_02: And it's very difficult, I suppose, in the current environment, when you have an embarrassment of riches, it's very difficult for a government to be that frugal.
• 23:07
  SPEAKER_02: And so it's it's a when you have a huge amount of demands on infrastructure, on day-to-day spending, education, health, it's a very difficult job.
• 23:15
  SPEAKER_02: But um, you know, we we said this in the in the budget podcast.
• 23:19
  SPEAKER_02: We do need to be a little bit more frugal now so we have those funds for a rainy day in the future.
• 23:25
  SPEAKER_01: And is this a theme that you're expecting to continue?
• 23:27
  SPEAKER_01: I mean, we know the issues that France have in terms of the fiscal situation, the political situation.
• 23:33
  SPEAKER_01: Is this pressure on the bond market expected to continue for much longer?
• 23:39
  SPEAKER_01: I know you probably say long as a piece of string and depending.
• 23:42
  SPEAKER_01: I can't see what the French are going to do next, but you know, it's been exacerbated.
• 23:46
  SPEAKER_02: Or the catalyst was the oil price shock, you know, and interest rates obviously, you know, we're at two and a half percent depot rate for the ECB.
• 23:53
  SPEAKER_02: Does that get back above three percent?
• 23:55
  SPEAKER_02: That's fairly restrictive territory.
• 23:57
  SPEAKER_02: So that will drive both the short end and the long end of the curve.
• 24:00
  SPEAKER_02: And then you layer on top, you know, the term premia, risk premia, whatever you want to call it, in a situation where you're seeing, you know, disorder on the streets in France and demands for more public spending, uh, and the markets are balking at you know, the French sovereign in terms of its its bonds uh in the secondary market at least, uh, and the ECB is reducing its holdings of bonds across the Eurozone.
• 24:23
  SPEAKER_02: So, what gives?
• 24:24
  SPEAKER_02: I expect we might see maybe the ECB might come over the hill to rescue things uh if we continue to see spreads widen over the next few months.
• 24:32
  SPEAKER_02: So I think this will continue as long as we have uh an energy price shock.
• 24:36
  SPEAKER_01: That's an if.
• 24:37
  SPEAKER_01: It's an if.
• 24:38
  SPEAKER_01: Um taking everything into account then, David, because this report it is only done twice a year, so there's a huge amount of information in it, and and we've only really looked at the tip of the iceberg on it.
• 24:50
  SPEAKER_01: But should our listeners view Iron's outlook with confidence, caution, or a mixture of both, in your opinion?
• 24:57
  SPEAKER_01: Now you're an economist, so I can nearly guess where this answer is going to go.
• 25:00
  SPEAKER_02: But I suppose I I suppose I should say a mixture of both to try and hedge my bets.
• 25:04
  SPEAKER_02: Look, I think we should, if we compare ourselves to other European countries, we've a huge uh amount of advantages.
• 25:10
  SPEAKER_02: And we're always saying banging on about being prudent in terms of our fiscal policy.
• 25:14
  SPEAKER_02: But you know, balance sheets are quite strong, the economy has performed well.
• 25:17
  SPEAKER_02: We are really exposed to global shocks, though.
• 25:19
  SPEAKER_02: Like we, you know, we we we're bobbing around in a global, you know, a very large ocean, a very small economy in a very large ocean that and we're reliant on those multinational companies and that US investment to continue to flow.
• 25:33
  SPEAKER_02: So we've built up a significant reliance, but we've also built up a significant amount of resilience, and it's about protecting that resilience for the future, I think.
• 25:42
  SPEAKER_02: So a little bit of confidence, I would say.
• 25:44
  SPEAKER_01: Great, David.
• 25:44
  SPEAKER_01: Thanks as always for your time and insights for today's podcast.
• 25:48
  SPEAKER_01: The publication will be available on our website.
• 25:50
  SPEAKER_01: And thanks also to all of our listeners, and indeed uh Rachel and Dan on the team behind us and John.
• 25:56
  SPEAKER_01: Remember to stay up to date with latest market developments.
• 25:58
  SPEAKER_01: Simply subscribe to AIB's Market Talk wherever you get your podcasts.
• 26:02
  SPEAKER_01: Until next time.
• 26:06
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• 26:09
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• 26:13
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