David McNamara: There is a strong case for the ECB to move even faster on rate cuts

The market is pricing about 60bps of policy easing between now and year-end.

Last week’s Irish GDP data provide the first full breakdown of the economy in the second quarter. 

Beneath the perennially volatile GDP data, the domestic indicators point to a picture of moderate growth so far in 2024. 

Modified domestic demand, which strips out some of the volatility of the multinational-dominated sectors, fell 0.5% quarter-on-quarter but was up 1.5% year-on-year. 

However, within this, consumer spending was up 1.1% quarter-on-quarter and 1.3% year-on-year, while modified investment fell 7% quarter-on-quarter (-0.8% year-on-year), reflecting a drop in machinery and equipment investment on a sector-specific basis, which might unwind in the coming quarters.

Other reliable domestic indicators point to continued robust growth in the Irish economy, including compensation of employees, up 3.7% year-on-year, mirroring the strong employment and wage growth in the second quarter. 

In the medium term, we expect Irish growth to persist at a more moderate pace, as the economy faces a number of capacity constraints, and the recent exceptional labour force growth begins to slow.

Elsewhere, last week’s exchequer returns also signalled ongoing growth in the Irish economy, with Vat receipts up 6% year-on-year in the three months to the end of September, while income taxes were up 7% over the same period. 

Exceptional growth in corporation taxes

The exceptional growth in corporation taxes continues, with receipts more than doubling in August compared to August 2023, while year-to-date, the Irish exchequer has collected €16.2bn in corporation taxes, a 28% rise on the same period in 2023. 

This gives significant leeway to the minister for finance as he prepares his first budget for October 1, but these multinational-driven tax revenues are highly concentrated amongst a small number of firms and subject to medium-term risks. 

In this context, a commitment to directing more revenues than planned towards the new sovereign wealth funds might be a prudent measure in the upcoming budget to build up buffers for the next economic downturn.

Turning to the week ahead, the monetary policy spotlight will be on the ECB meeting this Thursday. Having cut rates by 25bps in June, the ECB left policy on hold in July but refused to rule out a rate cut in September if warranted by the data. 

Since then, headline HICP inflation has declined to 2.2% in August, its lowest level since July 2021, although there has been little progress in core inflation which remains at 2.8%, amid elevated services inflation at 4.2% in August. 

Thus, despite market expectations for a 25bps rate cut this week, the decision from the ECB is likely to be a close call, although the meeting minutes from July indicate a rate cut is likely this week. 

A lot of attention will also be on the ECB’s updated macro-projections and the press conference with ECB president Christine Lagarde, as investors gauge the ECB’s view on the future path of interest rates. 

Currently, the market is pricing about 60bps of policy easing between now and year-end. Our view is that the ECB will cut rates twice more this year, on Thursday and again in December. 

However, given the anaemic growth picture across the eurozone, there is a strong case for the ECB to move even faster in the coming months.

• David McNamara is chief economist at AIB