Underlying domestic growth still quite strong, however, global uncertainties impacting headline indicators and export performance in particular

Continued economic growth is expected in 2023 and 2024, although domestic factors are currently outpacing multinational activity. Our forecast for Modified Domestic Demand (MDD), the more accurate measure of domestic economic activity, is for growth of 3.6 per cent this year and 4.0 per cent in 2024. The labour market continues to operate near full capacity, with the unemployment rate falling to a near-historical low of 3.8 per cent in May 2023 and is expected to average under 4 per cent both this year and next.

We continue to forecast a significant moderation in the inflation rate as price pressures begin to ease, particularly in the energy market. Lower inflation, coupled with some unwinding of high savings from the pandemic, is likely to boost consumption.

Continued growth is also expected in the public finances, with taxation receipts in the first 5 months of the year already 10 per cent above their level in 2022. We anticipate a significant surplus in the Government Balance in 2023 and 2024, some of which will be added to the National Reserve Fund.  

While these domestic factors remain strong, we do foresee general slowdowns in multinational activity as the high interest rate environment impacts global activity and investment decisions. Higher rates are also contributing to some moderation in investment activity and a cooling impact in housing and mortgage demand. Reduced global demand is also feeding through to export activity. Growth in exports is now expected to increase at a reduced pace, largely due to declines in pharma-related goods. Any further contraction in the pharma or ICT sectors may lead to downward revisions in export growth and lower the growth outlook.

While the robustness of the labour market is contributing to growth in consumption and income tax receipts, accelerated wage growth and capacity constraints are both likely to pose challenges to domestic growth. Risks of wage-based price increases may lead to persistently high inflation and labour-related constraints in sectors such as construction may dampen housing output.

Commenting on the report, author Kieran McQuinn of the ESRI stated: “The Irish economy is set to experience sustained growth in 2023 and 2024, however, global uncertainty will exert negative pressures on the domestic traded sector.”

Commenting on the report, author Conor O’Toole of the ESRI stated: “The domestic economy is continuing to grow robustly and the labour market is particularly buoyant. This is likely to lead to challenges in sectors such as construction and risks exerting upward pressure on general prices and wages.”