Quarterly Bulletin 2024:4 – Steady growth and lower inflation in the Irish economy, but geoeconomic risks are rising

• Modified Domestic Demand expanded by just over 3 per cent over the first nine months of 2024. It is forecast to grow by 3.1 per cent in 2025 and 2.5 per cent on average in 2026 and 2027.
• Households’ real incomes continuing to rise, with inflation expected to remain below 2 per cent on average over the forecast horizon.
• The possibility of escalated global trade tensions is rising, presenting significant downside risks to the public finances and the Irish economy.

The Central Bank has today (17 December 2024) published its fourth and final Quarterly Bulletin of 2024 (PDF 3.28MB). On the launch of the Quarterly Bulletin, Robert Kelly, Director of Economics and Statistics said: 

“The domestic economy has managed to grow at a steady pace in 2024, supported by an expansionary fiscal stance and weaker external inflationary pressures. The central outlook for the domestic economy is favourable going into 2025.  However, with the economy operating above its potential, Ireland’s current infrastructural constraints will limit further sustainable growth. These constraints add to the structural vulnerabilities in the economy and public finances, making the near-to-medium term outlook exceptionally sensitive to global economic developments.”

“The ability to sustainably deliver infrastructure is especially important in a small open economy like Ireland’s in order to maintain incentives for foreign investment. With the rising risk of geoeconomic fragmentation, and the extensive trade and investment links between Ireland and the US, the Irish economy would be particularly susceptible to changes in US policy on trade and tax.” 

“While specific policy actions of the incoming US administration are yet to emerge, higher tariffs or changes in tax regimes that reduce the profitability of US MNEs operations in Ireland could influence future investment decisions by those companies here, employment levels in their Irish operations and, most immediately, the related tax receipts to the Irish exchequer from their activities in Ireland and globally. A dependence has emerged on the substantial corporation tax receipts of recent years, linked to the activities of US MNEs. Only one third of the estimated excess corporation tax receipts are being diverted to the long-term savings funds to address needs in terms of infrastructure, climate and ageing, with the remainder financing within-year Government expenditure.”

Modified Domestic Demand expanded by just over 3 per cent over the first nine months of 2024, with employment growing by 2.8 per cent. This follows a similar pace of expansion in 2023. With the unemployment rate averaging 4.5 per cent for almost three years, the economy is at full employment and overheating risks are present. Growth in residential construction stalled in 2024 but is projected to pick up in 2025 based on the large number of housing commencements registered this year. The government’s budgetary stance continues to add demand to the economy. Combined with further growth in consumer spending as gross disposable incomes rise, these elements underpin the outlook for overall MDD which is forecast to grow by 3.1 per cent in 2025 and by 2.5 per cent on average in 2026 and 2027. The MNE-dominated sector is adding to overall economic growth in 2024 through the strength of pharmaceutical and ICT services exports. Although external demand conditions are weak by long-run historical comparison, net exports are projected to support economic activity out to 2027.

Externally influenced price pressures have substantially waned with domestically-driven services inflation becoming the largest contributor to overall price changes. Inflation for energy and non-energy goods is negative to date in 2024 and food inflation has dropped sharply. A range of measures of underlying inflation – stripping out some of these more volatile components – points to inflation running close to or below 2 per cent currently, with downward momentum. The largest positive contribution to overall inflation in 2024 is from services and this pattern is expected to persist over the forecast horizon. Services inflation is forecast to average 3.1 per cent from 2025 to 2027, close to its long-run historical average, with the headline rate projected to average 1.8 per cent over the same period. 

The number of people at work continues to rise supported by net inward migration of skilled workers and improvements in labour force participation. Employment increased by 88,400 persons in the first nine months of 2024, lifting the ratio of the number employed to the total population aged 15-64 to just below 75.3 per cent, the highest on record. Labour market conditions should remain benign in the near term, with the unemployment rate expected to stay close to its current low level of 4.5 per cent. With some easing of labour demand expected, nominal wage growth is projected to slow in 2025 and 2026, but remain above 4 per cent. Disposable income – which includes wage and non-wage income and social transfers – is forecast to grow by 4.7 per cent in nominal terms on average from 2025 to 2027. When combined with the projection for inflation, real income growth per household is forecast to average 1.8 per cent over the same period, bringing average household purchasing power to 8.4 per cent above its 2023 level in 2027.  

Risks to the growth outlook are firmly to the downside owing to the economy’s exposure to more pronounced global trade and wider economic tensions. In the near term, with the labour market already at full employment, further demand stimulus could result in higher and more persistent inflation with a negative effect on Ireland’s relative competitiveness. An escalation of global trade tensions (for example, from the widespread introduction of tariffs) would lower net exports and overall economic activity relative to the central forecasts. As Ireland’s largest bilateral trade partner, the direct exposure of the economy and public finances to changes in US economic policy is material. Policy changes affecting the activities of US MNEs in Ireland could lower net exports, domestic investment, employment, tax revenue and economic activity more broadly relative to the central forecasts.

Looking beyond the near-term, the potential per capita growth rate of the Irish economy is set to halve to around 1.4 per cent by the middle of the century as the working age population declines. Enhancing levels of investment in human and physical capital to support productivity growth and enabling people to stay longer in the workforce can in part offset this decline, supporting continued sustainable growth in Irish living standards. Such growth is also necessary to provide a tax base to fund the delivery of essential public services and infrastructure over the long-term. It is appropriate in future budgetary cycles to take steps to expand and diversify the tax base in light of the near-term cyclical position of the economy, the medium-term growing demands on the public finances, and to bolster the long-term resilience of both the economy and the public finances in light of prevailing risks.  From a broader perspective, sustainably mobilising household savings across the EU for investment in Europe’s – including Irelands’s -  productive capital stock would also enhance the resilience of households, businesses and the economy as a whole. 

Previous Quarterly Bulletins are available to view on the Central Bank’s website.