The Irish economy will resume a more positive growth trajectory this year as declining inflation, the likelihood of interest rate cuts and a robust labour market spur a pickup in activity.
In its latest economic commentary, the Economic and Social Research Institute (ESRI) delivered a broadly upbeat assessment of the State’s economic prospects for the coming year while warning that “infrastructural bottlenecks” in housing and other areas could erode competitiveness and limit capacity.
The think tank expects the economy to grow by 2.5 per cent in gross domestic product (GDP) terms this year and by 2.3 per cent next year. Irish GDP shrank by 3.2 per cent last year, placing the economy in a technical recession, amid a global downturn in demand which hit multinational exports.
“While global economic conditions deteriorated throughout the year on the back of higher interest rates, persistent inflation and geopolitical tensions, much of this decline in the Irish context appears to have been specific to the sectoral composition of Irish exports,” it said.
Improved conditions internationally will lead to an improvement in exports and a pickup in headline GDP, it said.
The domestic economy as measured by modified domestic demand is forecast to grow by 2.3 per cent in 2024 and by 2.5 per cent in 2025 as cost-of-living challenges fade, real incomes grow and the labour market remains robust.
Overall inflation is decreasing on the back of falling energy prices and is expected to average 2.3 per cent this year and 2 per cent in 2025. This compares to 6.3 per cent last year.
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“Unlike 2023, we expect all major indicators of economic activity to register positive growth in 2024 and 2025 indicating likely stable growth over the period,” said the ESRI’s Kieran McQuinn.
Despite the pickup in housing output (new home completions rose to just under 33,000 units last year), the ESRI warned that “substantial additional investment is going to be required” in the coming years if demand is to be met. The think tank is separately working on an estimate of domestic demand for housing which will inform revised State housing targets due to be published later this year.
In its report, the institute noted that while the economic outlook is positive over the medium term, there are several challenges which need to be considered.
“These include geopolitical tensions and their impact on global trade flows, dealing with infrastructure bottlenecks in an economy operating at capacity, and efficiently managing a small open economy with a very large multinational component,” it said.
Despite the employment footprint and the windfall taxes accruing to the exchequer from multinationals, these big firms have an impact on the costs in the economy such as wage levels, the institute said.
“As multinationals likely compete for resources, this can pose major challenges in an economy operating at full capacity with well-documented infrastructural deficits,” it said.
The ESRI warned that if the challenge of improving public services, tackling climate change and dealing with the shortage of housing and public infrastructure is to be effectively tackled, “we need to see further expansion of key domestic facing sectors, such as building and construction.”
“Achieving the necessary reallocation of labour resources, without doing major damage to the very important foreign multinational enterprise sector, will be challenging for policy,” it said.
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