The Economic and Social Research Institute (ESRI) has revised its growth outlook for Ireland’s Gross Domestic Product (GDP) downward, although it maintains that the underlying strength of the economy remains robust.
According to the latest ESRI Quarterly Economic Commentary for Summer 2023, the domestic economy, as measured by Modified Domestic Demand (MDD), is expected to experience strong growth in the coming years. The institute forecasts a growth rate of 3.6% for MDD this year and 4% in 2024.
The report highlights the labor market operating at near full capacity, with the unemployment rate reaching a record low of 3.8%. Household consumption remains resilient and stronger than previously anticipated.
The downgrade in GDP growth projections is primarily attributed to a surprising slowdown in export activity, particularly in the pharmaceutical and chemicals sector, leading to an increase in imports. However, concerns regarding the ICT sector proved to be unfounded, as its performance aligned with expectations.
The ESRI forecasts a GDP growth rate of 0.1% for this year and 3.5% for the following year. Export growth is expected to moderate to slightly over 4% in 2023 and just above 5% in 2024.
The institute will closely monitor whether the recent change in export activity is a one-off event driven by specific multinational firms or part of a broader trend influenced by international factors such as rising interest rates or currency fluctuations.
Regarding inflation, the ESRI expects a significant moderation in the inflation rate due to easing price pressures, particularly in the energy market. However, it notes that core inflation, which excludes volatile elements like energy, remains stubbornly high both domestically and internationally.
In the housing and construction sector, the ESRI predicts a decrease in expected housing unit completions for this year, but an increase in 2024 due to an earlier acceleration in housing starts. Changes in the interest rate environment have impacted the property market, potentially exerting downward pressure on house prices.
The ESRI anticipates continued growth in household spending driven by higher wages and a persistently high savings rate. It foresees a moderation in the savings ratio while expecting strong growth in the labor market, leading to accelerated wage pressures.
The institute acknowledges the challenges faced by the government in addressing infrastructural issues, particularly housing and healthcare, without overheating the economy. It emphasizes the need to invest in the economy’s productive capacity and resolve key infrastructural bottlenecks.
Minister for Finance Michael McGrath comments on the ESRI report, noting its recognition of the uncertainty prevailing in the international economy. He highlights the positive aspects of the report, including forecasts exceeding the government’s expectations for this year and the next. McGrath emphasizes the strength of public finances while acknowledging the challenges in maintaining fiscal sustainability and avoiding economic overheating. He indicates that changes to the income tax code will be necessary to ensure a fair and balanced tax system.
In summary, the ESRI report signals a downward revision in GDP growth, primarily driven by export slowdown, while highlighting the underlying strength of the domestic economy. The government aims to address challenges while maintaining fiscal prudence and promoting competitiveness through potential changes to the tax system.
