The Economic and Social Research Institute (ESRI) has cut its domestic economic growth forecasts for a third time this year as households and businesses rein in spending amid the cost-of-living crisis, rising interest rates and a slowdown in global economic activity.
Irish modified domestic demand (MDD), which strips out some of the ways multinationals can distort activity, is now expected to expand by 0.6 per cent this year, the ESRI said in its latest quarterly outlook report. That equates to a third of the pace projected two months ago and a fraction of the 3.8 per cent growth rate outlined in its first report of the year.
The ESRI has also gradually reduced its MDD estimate for next year to 2 per cent, half the rate predicted at the start of the year.
Gross domestic product (GDP), the broader and more internationally-recognised gauge of economic activity, is set to shrink by 2.7 per cent this year before rallying by 2.3 per cent in 2024, according to the ESRI. It would mark the first annual contraction in GDP since 2012 – coming off the back of 9.4 per cent growth last year and more than 15 per cent expansion in 2021.
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These new GDP forecasts also mark downward revisions from those outlined in October, and reflect a sharp pullback in investments and exports by multinationals, particularly pharmaceutical groups, that had fuelled outsized Irish GDP growth rates in recent years.
“Not to be the Scrooge before Christmas, but tidings of good news are not what we’re bringing for the overall economy,” said Conor O’Toole, an associate research professor at the ESRI. “The Irish economy is slowing. The external-trade sectors are slowing quicker. There are international headwinds to global trade that affects a small, open economy like Ireland.”
The slowdown in MDD is being driven by a fall-off in investment activity, which includes certain activities of multinational firms, the ESRI said. Elevated financing costs – after the European Central Bank (ECB) hiked its key lending rate from zero to 4.5 per cent in the 14 months to September – and a weakening global economy have prompted businesses to curtail investment, it said.
Housing investment, however, has been an outlier, with completions expected to rise to about 32,500, according to the ESRI, from almost 30,000 in 2022, as the sector seeks to catch up with demand even as it grapples with rising material and labour costs.
The ESRI said the effects of inflation on real incomes, increased interest costs and a drop-off in accumulated household savings from the pandemic period have all contributed to a moderation of private consumption. Still, it expects consumer spending to grow by 3.2 per cent for 2023 as a whole, before slowing to 2.5 per cent next year. Household spending had surged 9.4 per cent last year.
The labour market is holding up well, with employment levels set to rise close to 5 per cent this year to 2.671 million workers. While there had been an uptick in unemployment levels to 4.8 per cent in November from 4.5 per cent a year earlier, this was largely down to a reclassification of Ukrainian immigrants as eligible workers, according to the ESRI.
ESRI research professor Kieran McQuinn welcomed the Government’s decision in October to set up two sovereign wealth funds – aimed at paying for future additional healthcare and pension costs and investment in infrastructure and climate initiatives – as a way of capturing windfall corporate taxes, which are volatile in nature.
The ESRI said Budget 2024, which included a package of tax cuts, welfare increases and one-off payments, was “quite stimulatory” and would see consumer prices ease to only 2.9 per cent next year from 6.4 per cent in 2023. However, Mr McQuinn questioned the wisdom of the 5 per cent net core spending rule that the Government set itself a few years ago and is set to overshoot next year with spending growth of 6.1 per cent.
The basis of the rule – which assumes long-term annual inflation of 2 per cent and economic growth of 3 per cent – was already “questionable” given that the underlying economy has grown by an average 4.5 per cent over the past decade, he said. “We probably need to spend more time debating the merits of these individual rules rather than just expecting the Government to blindingly adhere to [them],” he said. “But, obviously, if a government makes a commitment in general it should stick to it.”
The Irish Fiscal Advisory Council has been particularly critical of the Government’s breach of its own rule.
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