The Economic and Social Research Institute (ESRI) has significantly downgraded its GDP growth forecast for the Irish economy, but says the fundamentals of the economy are still very strong.
According to ESRI, the domestic economy – as measured by modified domestic demand (MDD) – is expected to show strong growth both this year and next.
In its latest quarterly economic commentary for summer 2023, the institute forecasts MDD growth of 3.6% this year and 4% in 2024.
This suggests that the labor market is nearing full capacity, with the unemployment rate falling to 3.8% according to the latest official figures. An average unemployment rate of 4% is expected this year and next.
Private household consumption remains robust and is stronger than forecast at the beginning of the year.
The deterioration in GDP growth prospects is due to a somewhat unexpected slowdown in export activity, particularly in the pharmaceutical and chemical sectors, and a subsequent surge in imports.
Although concerns about downsizing in the industry were focused on the ICT (information and communications technology) sector, performance held up well and was in line with expectations.
The institute forecasts GDP growth of 0.1% this year and 3.5% next year.
Export growth is expected to moderate to just over 4% this year and pick up to just over 5% in 2024.
It will be monitored closely over the coming quarters to determine whether this is a one-off change resulting from transactions by a small number of multinational companies, or is part of a broader trend driven by international factors such as the rising interest rate environment or currency movements .
The ESRI forecasts a significant weakening of the inflation rate for the coming year as the price pressure, especially in the energy market, eases.
However, it notes that core inflation, which excludes volatile elements such as energy, remains “stubbornly” high for both Ireland and internationally.
In the housing and construction sector, the institute forecasts a decline in expected completions of residential units this year with around 27,000 completed units – compared to almost 30,000 completed units last year.
It has been noted that there has been an acceleration in housing starts in the first few months of 2023 after a slowdown over the past year, which is likely to lead to an increase in housing completions in 2024.
Together with changes in the interest rate environment, this affects the development of the real estate market.
“Rising interest rates are likely to put downward pressure on the housing market,” said Dr. Conor O’Toole, associate research professor at ESRI.
“In the past few months, the rate of growth in house prices has slowed down rather quickly. Adjusting for inflation, real house prices fall,” he added.
The institute forecasts continued growth in household spending, driven by rising wages and the persistently high savings rate across the economy since the pandemic.
She assumes that the savings rate will weaken in the coming months, but that the labor market will continue to grow strongly.
“This is actually leading to accelerated wage pressures. We expect wages to increase by about 5% this year and 6% next year,” said Kieran McQuinn, ESRI research professor.
“That’s quite an increase in wage-related costs.”
He pointed out that strong wage growth in the multinational sector is putting pressure on wages in the domestic sector, which he says is leading to competitive pressures, especially for domestic companies.
On public finances, Professor McQuinn said that a slowdown in pharmaceutical exports would result in lower corporate tax revenues would be closely monitored.
Treasury receipts continue to be forecast to play a key role in reducing the debt ratio.
The institute raised concerns about the possibility of overheating due to capacity constraints in the economy and the availability of excess cash in the treasury, mainly due to higher-than-expected corporate tax receipts in recent years.
“Government is in a very difficult position when it comes to addressing the infrastructure problems that exist…especially those related to housing and healthcare,” Professor McQuinn said.
“The challenge is to address them [issues] without overheating the economy, which is very difficult to achieve,” he added.
He said the key is to invest in the economy’s productive capacity and address key infrastructure bottlenecks, such as housing.
Unemployment is the lowest on record at 3.8%, Prof McQuinn said, adding that it also shows people are having a really hard time finding work.
“If you see the impact, you see higher wage rates and we expect wage rates to go up about 5% this year and 6% next year and all of that is adding to costs in the economy.”
He said inflation rates were already rising, mostly due to factors beyond “our control”, citing the pandemic and the war in Ukraine.
“I think what you might see in the period ahead is that as those inflationary pressures subside, domestic inflationary pressures could pick up faster because of the underlying strength and growth of the economy.”
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