Reduced but consistent growth in the Irish domestic economy
Despite a notable decline in headline investment levels recently, the underlying growth momentum of the Irish economy is expected to remain robust throughout 2024 and 2025, according to the ESRI’s Quarterly Economic Commentary, Autumn 2024. Key positive factors for the Irish economy include real wage growth, potential further interest rate declines, and strong labour demand. The ESRI anticipates that GDP, largely driven by foreign-dominated sectors, will experience an overall contraction of -0.4 per cent in 2024, followed by a partial recovery to a growth rate of 2.5 per cent in 2025.
Modified domestic demand (MDD), a more accurate measure of underlying Irish economic performance, has displayed more modest growth rates recently but is still expected to grow by 2.3 per cent in 2024 and a further 3.1 per cent in 2025.
Overall, the rate of inflation continues to decline, with electricity and gas — previously the largest contributors to inflation — now experiencing negative price growth. This trend, coupled with rising nominal wages is contributing to ongoing real wage growth, which is expected to continue and increase. The ESRI expects Consumer Price Index (CPI) inflation to rise by 2.3 per cent in 2024 and just 1.2 per cent in 2025.
The Irish labour market remains robust, with the unemployment rate projected to approach 4 per cent over the next year. This is particularly notable considering the significant population growth currently underway. In this context, recognising the role of net inward migration in Ireland’s ongoing economic success is essential. The ESRI expects unemployment to be 4.3 per cent in 2024 and 4.2 per cent in 2025.
Considering the upcoming Budget, a box in the Commentary assesses the sustainability of recent and projected increases in government expenditure. It concludes that future spending is sustainable relative to the economy’s scale. However, the significant rise in spending necessitates the preparation and monitoring of indicators to track productivity and efficiency in key areas of public policy such as healthcare.
Risks to the domestic outlook include elevated interest rates, global uncertainties and the potential for second-round inflation arising from a domestic economy operating near capacity. A critical risk is the concentration of the public finances towards corporation taxation which is reliant on a small number of companies.
Commenting on the report, author Kieran McQuinn of the ESRI stated: “While the present robust nature of the Irish public finances enables key infrastructural issues to be addressed, it is essential that increased Government spending is conducted in a prudent and precise manner.”
Commenting on the report, author Conor O’Toole of the ESRI stated: “The Irish labour market is currently operating with little to no slack. Given this low unemployment and the recent decline in inflation, we expect real incomes to increase this year and next.”
