Irish Manufacturing Sector Faces Sharp Decline in Activity Levels
Activity levels in Irish factories experienced a significant decline last month, marking the sharpest rate since the height of the COVID-19 crisis. The latest AIB Irish Manufacturing Purchasing Managers’ Index revealed that export sales, in particular, were cause for concern. This decline comes at a crucial time as the government prepares to release its latest economic outlook. The survey covers both multinational companies, including pharmaceutical giants that export globally, and Irish-owned factories that sell products domestically. Similar surveys have been conducted across economies worldwide.
The June survey indicates troubling signs of a rapid slowdown in global product demand following the rise in world interest rates and the end of the post-pandemic boom. These developments have significant implications for Irish exports, the economy, public finances, and employment. Factory output experienced its fastest decline since early 2021, while the overall health measure of the manufacturing sector in Ireland dropped at its sharpest rate in three years. Additionally, Irish manufacturing employment fell at the fastest pace in almost three years. The survey reported widespread reports of weakening demand, especially in the export market.
Foreign client demand has deteriorated for the 13th consecutive month, with a strong overall decline. This decline in demand has greatly impacted new orders, which have decreased for the fourth consecutive month. Difficulties in securing sales were particularly prevalent in the export market. These findings raise concerns about the sustainability of Irish government tax revenues, which heavily rely on multinational corporations.
The Irish government is set to publish updated economic forecasts on Tuesday, which will be submitted to the Economic Commission before unveiling the 2024 budget in September. The Department of Finance will also release the latest exchequer returns, providing information on tax revenues collected in June and the spending undertaken by government departments during the month. While tax revenue figures, especially corporation tax receipts, have traditionally been scrutinized for the significant amounts paid by a small number of multinationals, this time, there are early signs of a potential slowdown in parts of the multinational economy.
The Economic and Social Research Institute (ESRI) highlighted concerns about the slowdown in pharma exports during the early months of this year in its quarterly report. This slowdown raises questions about the sustainability of government tax revenues, as pharma multinationals, such as Pfizer, contribute significantly to tax collection. The government has already committed to allocating billions of euros from corporation tax revenues to the National Reserve Fund and a new sovereign fund, should plans for a second fund be implemented.
The AIB survey attributed the drop in factory output to subdued demand and a sustained decline in new orders. Unfavorable weather conditions were also cited as a hindrance to new sales. The decline in new sales was primarily linked to current demand fragility, while the decline in new export orders, although softer than May’s record fall, remained strong. On a positive note, there was a decrease in price inflation, with input costs falling due to moderation in raw materials and reductions in electricity and gas costs.