Irish economy set for better-than-anticipated growth, but high prices pose a challenge despite inflation moderating

Further growth in the domestic economy is expected in 2023 and 2024 given the better-than-anticipated international outlook, which is mainly attributable to an expected moderation in inflation. Our forecast for Modified Domestic Demand (MDD), the more accurate measure of domestic economic activity, is for growth of 3.8 per cent this year and 3.9 per cent in 2024. In the labour market, the unemployment rate has fallen to a near historical low of 4.3 per cent in February 2023 and we anticipate employment to remain strong throughout this year and next.

Modified investment, which had grown very strongly throughout 2022, is expected to grow at a slower pace in 2023, however, it will also contribute to growth in the present year. Exports, which contributed significantly to overall growth in 2022, are expected to continue to drive growth this year and next.  

Due to the strength of exchequer receipts and corporation tax revenue in particular, we anticipate a significant surplus in the Government Balance in 2023 and 2024. However, as noted throughout this Commentary, an increasing concentration of corporation receipts from the pharma and ICT sector leaves the exchequer vulnerable to firm-specific risks.

We now expect inflation to moderate considerably due to falling energy costs. We now anticipate inflation to average 4.5 per cent in 2023 before falling further to 3.5 per cent next year. While inflation is expected to moderate, price levels are going to remain high which is likely to pose cost of living challenges. Furthermore, if second round effects exert upward momentum on price levels, a higher-for-longer interest rate cycle would likely be followed to address this. Such a policy could take longer to be effective and thus presents downside risk to the global macroeconomy. Further downside risks internationally relate to a tightening of financial conditions and a broadening of banking stress as well as any escalation in tensions regarding the Russian invasion of Ukraine.

Commenting on the report, author Prof Kieran McQuinn of the ESRI stated: “While the international outlook is still uncertain, the Irish economy is likely to grow somewhat stronger in 2023 than had previously been expected.”

Commenting on the report, author Dr Conor O’Toole of the ESRI stated: “Despite a moderation in inflationary pressures in 2023 relative to 2022, high price levels are likely to present challenges for vulnerable households. Any ongoing cost of living measures should therefore be tailored and targeted to groups with the most need.”