RSM Ireland says strong domestic economy should keep unemployment close to 5% despite energy price risks.
Ireland’s labour market regained momentum in the second quarter of the year, with a sharp rise in employment helping to steady confidence in the economy despite ongoing uncertainty linked to energy markets and global geopolitical tensions.
According to Thomas Pugh, chief economist at audit, tax and consulting firm RSM Ireland, employment increased by 19,500 on a seasonally adjusted basis during the second quarter, reversing the decline recorded in the opening months of the year.
“The economy remains strong enough to keep the unemployment rate around 5%”
“The labour market looks to have weathered the initial phase of the Iran conflict well. Employment jumped by 19,500 in seasonally adjusted terms in Q2, unwinding the fall in Q1,” said Pugh.
He noted that government support measures helped to cushion the impact of rising energy costs on households and businesses.
“Generous fuel subsidies have limited much of the impact of higher oil prices on inflation and the economy. Granted, employment growth will still moderate this year, but the economy remains strong enough to keep the unemployment rate around 5%.”
Improving employment growth
The latest figures also point to improving conditions in the jobs market. The seasonally adjusted unemployment rate eased from 5.0% to 4.9% during the quarter, a development that Pugh believes indicates that the weaker performance seen earlier in the year was temporary.
“Most importantly, improving employment growth meant that the seasonally adjusted unemployment rate nudged down from 5.0% to 4.9%, which reassures us that the weakness in Q1 was a blip rather than the start of a sharp slowdown in the Irish labour market.”
Looking ahead, RSM Ireland expects employment growth to cool from the exceptionally strong pace seen in recent years. Even so, the strength of the wider economy is expected to underpin labour market stability.
“Indeed, even as employment growth moderates after a period of exceptional strength the economy is strong enough to keep the unemployment rate steady. We expect the unemployment rate to average 5.0% this year and increase only a little to 5.1% next year.”
Pugh said steady employment levels should continue to support household spending, helped by rising real incomes and healthy savings levels.
“That should ensure real household incomes continue to grow which will support consumption. What’s more, households are already saving 12.5% of their incomes, which gives them plenty of room to offset some of the impact of higher inflation on spending through lower savings.”
The outlook for the remainder of the year remains positive, with RSM forecasting continued job creation despite persistent economic headwinds.
“All told, strong momentum in the domestic economy means that we expect solid jobs growth to continue in the second half of the year even with growing headwinds from higher energy prices, persistent uncertainty and ECB rate hikes.”
However, Pugh warned that renewed instability in the Middle East remains a key risk to the employment outlook.
“The big risk is that renewed tensions in Iran prompt energy prices to ratchet up even further, pushing inflation over 4% and prompting firms to pull back on hiring as margins are squeezed.”
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