What to expect for the Irish economy in the second half of 2023?

This week we have published our new forecasts for the Irish economy.

On this occasion we have revised down our projection for Irish GDP growth to 5.5% in 2023 (from 6.9% previously). Why? 

GDP growth revised down because of volatile multinational sector 

The main reason is volatile data and revisions relating to the export and multinational sectors. Specifically, the Central Statistics Office’s latest estimate is that Irish GDP contracted by 4.6% in the first quarter of 2023. However, this looks to be a temporary blip. The fall entirely reflected the industrial sector. Monthly industrial production data show that output fell by 45% in March before bouncing back by 70% in April. 

These recent data points illustrate that the GDP data are an increasingly unreliable measure of underlying activity in the Irish economy. Nonetheless, conditions in the global economy are clearly challenging for Ireland’s export sector. The Irish manufacturing Purchasing Managers Index (PMI) for June, also published this week, was 47.3 – a three-low – indicating contracting output. 

Hence, we do expect a slowdown in Irish export performance in 2023 and 2024 from the double-digit rates of expansion seen in recent years.  

Irish domestic economy expanding rapidly

Since our last forecasts in February, there has been extraordinary resilience in the domestic economy to higher energy prices and elevated CPI inflation. In the first quarter of 2023, employment grew by 1.9% to a fresh record high of 2.62m and is now 12% above pre-pandemic levels. Furthermore, initial indicators suggest job creation remained exceptionally strong in Q2. 

We had forecast that the surge in households’ energy bills, following rapid electricity and gas price hikes last summer, would lead households to rein in spending through the turn of the year. That simply hasn’t happened. Consumer spending rose by 1.7% in the first quarter, and core retail sales volumes were up 1.4% in the three months to May. Of course, some of this resilience in household spending reflects the support in Budget 2023 via energy price credits and tax cuts. 

Hence, our forecasts for employment (4.2%), consumer spending (5.3%), modified domestic demand (3.4%) and indigenous sector output (4.9%) growth in 2023 have all been revised up since our last projections. As in other countries, there appears to have been more momentum in household spending and economic growth coming out of the COVID-19 pandemic than was fully appreciated. 

Ireland's housing market softening 

We have retained our forecast for 1.5% residential property price inflation through 2023. Although prices fell in the first four months of the year, they are likely to gather momentum in H2 due to the surprise loosening of the Central Bank’s mortgage lending rules. 

In May, the average approval for house purchase was €297,000, still up 3.8% on the year. This is a very different picture to the UK and other countries, where interest rate hikes are expected to push down house prices. 

There has also been good news on homebuilding. There were 30,900 completions in the 12 months to March, well ahead of most projections and despite fears that rising input costs and interest rates were hurting viability. Hence, we have revised up our forecast for completions in 2023 to 29,800 – an improvement but still unlikely to satiate pent-up demand after years of under-supply. 

What to do with the buoyant public finances? 

Our new forecast is that the Irish government will run a surplus of €12.2bn (2.2% of GDP) in 2023, rising to €16bn (2.8% of GDP) in 2024. In doing so, we have assumed that tax revenues will grow faster than conservative official projections but also spending, likely to be pushed up in the next Budget for 2024 – probably the last before the next general election. 

Our forecasts imply that the debt/GDP ratio will fall to 39%, a relatively safe level. However, there is still the risk that Ireland is too reliant on potentially volatile corporate tax revenues. Hence, Ministers for Finance and Expenditure Michael McGrath and Paschal Donohoe have proposed that the government invest almost the entire surplus, up to €12bn per annum, in a new sovereign wealth fund. 

Capacity pressures, ECB rate hikes and persistent inflation will see slower growth in 2024 

Our forecasts are for GDP (4.5%), employment (2%) and modified domestic demand (2.5%) to see slower growth in 2024.

A key reason is the growing capacity pressures in the Irish economy. Employment has expanded far more rapidly than in other European counties. This has been facilitated by high levels of inward migration. However, labour shortages are increasingly apparent, evident in the unemployment rate at 3.8% and high vacancies. Ireland’s frantic pace of job creation cannot be sustained in the medium term. 

Also, ECB rate hikes and inflation are hurting parts of the Irish economy, particularly the construction sector. Homebuilding has been hit by viability issues, with starts decelerating, and completed office developments look set to halve in 2024. Many Irish households will also face higher interest rates as their existing fixed terms on their mortgage debts expire. 

Finally, imports of intangible intellectual property assets, as firms moved to comply with corporate tax reforms, have artificially pushed up on Ireland’s measured GDP growth rate. Looking forward, these distortions should hopefully dissipate so that the GDP growth rate slows but gives a better representation of underlying conditions in the economy.    

(Source: Central Statistics Office; Q1 Labour Force Survey and Quarterly National Accounts Report, 2023)