An emerging consensus among Irish economic forecasts now sees a significant slowdown in the economy in the second half of this year and into 2024. The Central Bank is the latest of the main agencies to follow this line of argument , following recent work from the Economic and Social Research Institute (ESRI), IBEC, the IMF, the Fiscal Advisory Council and the Department of Finance. The economy may not be as weak as the headline Gross Domestic Product (GDP) figures suggest, but the post-Covid bounce is now well and truly over.
The Central Bank report points to a " complex and mixed picture” and this is clearly correct. While headlines tend to focus on the economy growing or contracting, the reality is more complicated. The fall-off in GDP reflects, in part at least, a fall-back in pharmaceutical exports after the Covid-19 surge. The Central Bank speculates that this sector may resume growth, but the outlook for sectors of the tech industry are less certain. Recent IDA figures, showing a fall-off in multinational employment, are a warning signal.
In the domestic economy, investment has fallen, while consumer spending has continued to rise, albeit more slowly. The jobs market’s strong performance remains a significant support. Overall, the bank says, the domestic economy will grow for the year as a whole, though more slowly than previously anticipated due to trends in the second half of this year. It anticipates some improvement next year as inflation declines and cost-of-living pressures ease a bit.
The series of forecasts published in recent weeks all have similar themes – a general resilience in economic performance, but risks ahead and the need to invest to address shortcomings in areas such as housing, water and energy.
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For the Government this creates a set of related challenges. All agencies welcome the creation of two new funds to put away money for the future, notably to support long-term investment. However, as the Central Bank says, full details of these funds have still to be agreed and the amount of money they will contain could be affected by swings in corporate tax revenue.
The job of Government is, first, to ensure the public finances are resilient and can support the required investment. The trade-off here will be running down the general household supports introduced during the cost-of-living crisis and continued in Budget 2024. The second key challenge is managing the vital investments, with all the complications that entails.
With a general election approaching, the temptation will be to continue the general household supports and avoid the hard decisions needed to accelerate the delivery of vital projects for the longer term. If this happens, what may prove a temporary boom in the public finances would be wasted.