“The multi-faceted nature of the economy frequently makes it difficult to decipher how economic conditions in Ireland are changing. This has rarely been more so the case than in 2023. In headline terms, economic activity as measured by GDP will likely contract for the year as a whole. At the same time, the domestic economy as measured by modified domestic demand (MDD) will likely grow, albeit with a pronounced slowdown through the course of the year. The result of this is slower growth in MDD over the forecast horizon in this Bulletin. MDD is forecast to grow by 2.5 per cent in 2024, and by 1.9 and 2.0 per cent in 2025 and 2026, respectively.”
Headline inflation has fallen in 2023 as externally driven price pressures have eased. Falling energy prices have contributed most to the drop in headline inflation to date and recent data show a marked easing in price rises for other non-energy industrial goods. A more generalised reduction of externally driven price pressures is expected to continue, bringing headline inflation back to 2.1 per cent in 2025.
The labour market in Ireland has been remarkably resilient. Whilst employment creation and lower vacancy rates are emerging, unemployment remains relatively low. This is expected to remain the case over the forecast horizon. Wage growth is picking up in response to the tight labour market conditions, and in part to reverse real wage declines experienced since 2021. Growth in real hourly wage rates has turned positive in the latter half of 2023. Examining the different experience of inflation and disposable income growth across households, the evidence suggests that while overall real household income has returned to pre-Covid levels, that of lower income households has not. Unemployment is set to rise slightly to 4.8% in 2024, but remain below 5% out to 2026.
GDP has contracted in the first three quarters of 2023 driven by weaker cross-border exports along with a sharp drop in exports that are produced abroad, but counted in Irish National Accounts statistics. Physical exports produced in Ireland have declined in 2023, due mainly to lower activity in the pharmaceutical and ICT manufacturing sectors. GDP has been further reduced by a sharp decline in offshore exports. Nevertheless, GDP does not provide a good indicator of economic conditions in Ireland, which are better measured by MDD and employment.
Economic activity has slowed noticeably in 2023 but the economy is still expected to grow over the forecast horizon. Recent data confirm a retrenchment in the MNE-dominated part of the economy, with signs that domestic activity has also slowed. Improvements in real income are projected to support modest increases in MDD in 2024 and 2025. After the unusual weakness in 2023, net exports are expected to recover in 2024. Nevertheless, external demand conditions remain weak relative to previous historical patterns. The ongoing transmission of tighter monetary policy to the economy will weigh on growth, which is already being limited by capacity constraints. As a result, the economy has shifted onto a slower growth path following the strong post-pandemic recovery.
The growth outlook is uncertain and downside risks have increased. The growth forecasts are contingent on a rebound in the pharma and ICT manufacturing sectors in 2024. A more prolonged downturn would weaken export growth, domestic investment and economic activity more broadly relative to the central forecasts. The inflation outlook assumes energy prices continue on a downward path and excessive domestic inflationary pressures are avoided. Near-term inflation risks are to the upside and are more balanced thereafter.
Domestically, the pass-through of higher policy rates to retail rates on loans and deposits held by Irish consumers and businesses has become more pronounced. There are some indications that this is influencing credit demand and relative preferences for liquidity, with a small shift out of low/no-interest bearing overnight deposits to term and notice deposits with higher rates of return. Alongside the effect of the broad-based monetary policy tightening over the past 18 months or so, the pass-through to retail interest rates is weighing on demand conditions both in Ireland and in its major trading partners.
It is important that domestic policy is focussed on the need to maintain macro-financial stability over the near-to-medium term. Policy actions by domestic authorities should not unnecessarily aggravate any remaining imbalances between domestic demand and supply conditions, and thereby disrupt the gradual disinflation foreseen for the coming years. The opportunity arises for achieving this aim while at the same time delivering the necessary scale of investment to address critical needs in housing and related infrastructure, alongside that required to decarbonise the economy and mitigate the implications of climate change.