Ireland is a high cost economy, with the cost of doing business higher than in many of its European neighbours. As a tourist destination Ireland has positioned itself as a value experience rather than an inexpensive destination. Close to 60% of pre-pandemic holiday visitors consistently rated their experience as ‘good or very good’ value for money.
Business costs in Ireland are relatively high in a European context. For example, Ireland’s minimum wage is more than 70% above the EU average, while electricity (+14%) and cost of credit (+50%) have historically been well above the European norm.
Tourism as a labour, energy and capital intensive industry – these high cost inputs feed directly into higher prices for the visitor.
The already high input costs are currently under further pressure from rising inflation. Should the rate of inflation in Ireland exceed the rate in other European countries the competitiveness of Ireland’s tourism offering will be further eroded.
The price of a visit to Ireland reflects the cost of living within the country.
Ireland was the most expensive country to live in across the EU in 2022. Consumer costs in Ireland were 46% above the EU average. Only Switzerland, Iceland and Norway had a higher cost of living.
The highest price level for alcohol and tobacco was recorded in Ireland at more than twice (+116%) the EU average, due mainly to high taxation on these products.
The EU Harmonized Index of Consumer Prices shows that over the past decade the national annual rate of inflation in Ireland has outpaced the rate of increase in most other EU states. Ten years ago prices in Ireland were 18% above the EU with the cost of living the fifth highest in the EU after Denmark, Finland, Luxembourg and Sweden.
Rising costs and supply issues driving prices
The annual inflation rate in Ireland fell to 6.6% in May 2023 from 7.2% in April, the lowest since February 2022. Cost of energy increased, with electricity (+34.7%) and gas (+47.4%). Also, prices of food & non-alcoholic beverages rose by 12.7%, reflecting a rise in prices across a range of products such as sugar (+42.5%), frozen fish (+28.1%), fresh whole milk (+18.9%), and eggs (+18.8%). Prices in restaurants and hotels rose by over 8.1% over the twelve month period to May 2023.
On a monthly basis, consumer prices went up 0.3%. The divisions with the largest month on month growth in May were Restaurants & Hotels (+1.6%) and Alcoholic Beverages & Tobacco (+1.0%), while Transport, energy and communications showed a decline.
Most of the pick-up in inflation since mid-2021 has been driven by energy products and food. The contribution made by other components was also increasing as energy costs and supply chain disruption begin to feed through into core inflation (excluding energy).
Despite a fall in the rate of price increases, Ireland’s inflation rate is currently running ahead of the annual rate across the Eurozone at 6.1% in May. With global energy and food prices continuing to ease, domestic factors are beginning to play a more important role in the inflation outlook. Latest forecast from the Central Bank see annual inflation in 2023 falling to 5.3%, before dropping to 3.4% in 2024 and 2.5% in 2025.
Producer prices across Europe, an early indication of trends in consumer inflation, fell for a seventh consecutive month in April, almost entirely due to declining energy prices, according to the latest data from Eurostat.
Taking both the changes in prices (inflation) and the price level together, Ireland’s inflation rate has moved from being one of the lowest in the EU and below the Euro area average – moving Ireland into having a current price profile that may be described as ‘high cost, rising quickly’.
Rising prices in hotels and restaurants
Typically almost 80% of the expenditure by tourists in Ireland is on accommodation, food and drink, and internal transport. Pre-pandemic, Ireland was ranked in the top 5 most expensive destinations in Europe for the main items consumed by visitors.
With significant rises in the costs of business, prices in hotels and restaurants have been rising above the rate of overall inflation in Ireland.
Latest data from the CSO shows that the annual rate of inflation for accommodation services, predominantly hotels, was running at 14.7%, while the year on year price rise for restaurants and cafes was 6.8%.
While there are identifiable underlying costs and supply factors to explain the high rate of increase in prices in the accommodation sector, the concern is that the rate of price rise in Ireland has been higher than in many competitor European destinations. Price inflation in the restaurant sector is broadly in line with experience across the EU.
Annual inflation rate for hotels, motels, inns, and similar accommodation establishments in the European Union was 13.2% in April 2023. While the rate of price increase declined compared to the peak reported in June 2022, that figure still represented one of the highest rates recorded since December 2017.
A tight labour market, higher costs and skills shortages
Ireland is experiencing a tighter labour market than across the EU, as the number of people at work in the State reached a record high of 2.61m, having grown by 102,700 or 4.1% in the year to March 2023. Unemployment in Ireland hit a record low of 3.8% in May 2023, following a steady decrease in the rate since March 2021 and despite net immigration last year of 61,000. The seasonally adjusted number of unemployed people (15-74 years) was 103,300 in May, a decrease of 8,700 compared to a year earlier. An unemployment rate of 4% or less is commonly regarded as tantamount to full employment.
Unemployment across the EU has been stable at 6.0% in March and April 2023, down marginally in 6.1% a year ago.
The labour market in Ireland is forecast to remain tight in the immediate future, with The Central Bank projecting an annual unemployment rate of 4.1% in 2024 and 4.2% in 2025.
Tourism and hospitality is a labour intensive business, with the quality of personal service a key value. With effective full employment levels, the tourism and hospitality industry is facing an existential challenge, with upward pressure on wages inevitable and the risk of a further deterioration in the already depleted supply of critic skills.
Latest data from CSO shows that employment in the Accommodation and Food Services sector in Q1 2023 was 3.8% below the same period in 2019, in contrast to total employment in the State increasing by 12.6% over the same period. It is obvious that recovery in employment in the tourism sector is lagging behind the overall economy, with the hours worked in the sector down 10% on Q1 2019.
Labour costs in Ireland have tended to be higher than in many other European states. The minimum wage is the 5th highest in the EU after Luxembourg, Germany, Belgium and the Netherlands. However, the average wage within the Accommodation and Food Services is close to the average across the Eurozone, with workers in the sector in Luxembourg, France and Belgium more highly paid.
The recruitment situation in the hospitality and tourism sector has become more acute. Staffing shortages resulted in considerable stress on meeting demand in 2022 and continues in 2023. Despite businesses investing in recruitment and training, realignment of working hours, and increasing rates of pay, many operations have been forced to reduce trading – a cut in opening hours or a reduction in capacity on offer. In certain instances it has resulted in some business closures.
One in ten respondents to Fáilte Ireland’s most recent Barometer survey cited difficulty in recruiting staff as the reason for delayed opening for the 2023 season. Across the industry more than one in three (37%) highlighted the difficulty in recruiting staff – with 71% of restaurant and 63% of hotel respondents raising it as a significant concern. An ongoing shortage of chefs would appear to continue to plague the sector.
From a customer perspective the result has been a reduction in choice and/or the quality of the experience. This coupled with higher prices runs the risk of more serious longer term reputational damage and stalling growth.