Ireland’s economy remains on a “solid growth path” despite the wider inflationary crisis, according to the latest spring forecast from the European Commission. However, the EU’s executive arm warned that “housing undersupply” continues to pose a distinct risk to labour supply and competitiveness.
The warning comes as a report from Irish property group BNP Paribas Real Estate indicated home building slowed for a seventh consecutive month in April and at a sharper rate than before.
Following double-digit growth in 2022, the commission said it expected Irish GDP (gross domestic product) to remain strong at 5.5 per cent this year and 5 per cent in 2024 while modified domestic demand, which better reflects underlying domestic activity, is projected to expand by 2 per cent in 2023 and 2.3 per cent in 2024.
Net exports, primarily from the multinational sector, continue to be the main driver of economic activity, the commission said. However, it warned that the recent record performances of the export-intensive pharma and IT sectors, which followed the uplift during the pandemic, are unlikely to be sustained.
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While remaining strong, net exports are projected to moderate slightly in 2024, it said.
As well as exports, growth would be driven by “resilient private consumption”. Consumer spending was expected to remain solid thanks to increasing household income and employment.
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“While retail sales and services grew only mildly in early 2023, consumer sentiment in Ireland appears resilient to cost‑of‑living pressures,” the commission said.
Inflation in the Irish economy is expected to gradually slow throughout 2023 to reach 2.6 per cent in 2024. Ireland’s inflation rate fell to 7.2 per cent in April, according to the most recent figures.
The main risk to Ireland’s economic outlook include a “potential shock” affecting global and high value-added sectors and the impact of housing undersupply on labour supply growth and competitiveness, it said.
Despite a recent rise in the participation rate, employment vacancy rates are above historical averages, “indicating marked difficulties to fill vacant positions”.
On the public finances, the commission said budget surpluses are expected to widen in 2023 and 2024
It noted that the number of people in work was close to record levels and the unemployment rate was at near-historic lows of 4.3 per cent.
“This labour market tightness is expected to persist throughout the forecast horizon. As the Irish economy is estimated to be operating at full employment, real wages are projected to increase significantly,” it said.
On the public finances, the commission said budget surpluses are expected to widen in 2023 and 2024, “supported by a robust labour market and strong dynamics in the economy”.
In the longer term, it warned that international tax policy changes are set to take effect and might reduce revenues from corporate taxes.
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The reallocation of tax rights in favour of bigger countries is expected to shrink Ireland’s corporate tax base but as yet there is little agreement in this area.
On the wider euro zone economy, the commission said it had performed better than expected in the context of the inflationary shock and the war in Ukraine.
“The EU economy is in better shape than we projected last autumn. We avoided a recession and are set for moderate growth this year and next. Yet risks are too plentiful for comfort – we must remain vigilant,” Paolo Gentiloni, the commissioner for economy, said.
The commission warned the “persistence of core inflation” has emerged as a key risk.
“It could continue restraining the purchasing power of households and force a stronger response of monetary policy, with broad macro-financial ramifications,” it said.
