Continued economic growth comes with caveats

Throughout the winter, Ireland’s economy has remained strong across all key macroeconomic indicators. However, a discourse is emerging that economic bottlenecks may hamper growth and competitiveness. Dr Daragh McGreal looks at what this will mean for the Irish economy

Last year, despite challenges facing the global economy, Ireland’s economy was the fastest growing in Europe, with GDP growth of 12.2 percent and Modified Domestic Demand (MDD), used to measure the domestic economy, rising by 8.2 percent.

The strong end to 2022 was driven by higher levels of investment by multinationals in intellectual property, continued growth in exports, higher private consumption (despite downbeat consumer sentiment) and a predominantly mild winter.

Inflation and global uncertainty

Despite these positives, there are several uncertainties, such as a mixed global outlook, tighter European Central Bank (ECB) monetary policy, higher levels of inflation, and service/infrastructure demand challenges.

However, the government benefited from the exceptional level of tax receipts in 2022 that facilitated a budgetary surplus, allowing it to invest significantly in social transfers to cushion households against more severe impacts on their disposable incomes.

Inflation since the start of 2023 has been somewhat more persistent than anticipated, standing at 8.1 percent in February, up from 7.5 percent in January.

While there has been a fall in the cost of energy, inflation in other sectors remains high. As 2023 evolves, we expect inflation to fall potentially to 5 percent due to decreasing energy prices.

Yet, while inflation may fall, the expected further monetary policy tightening from the ECB would cause issues for homeowners in Ireland, who will see mortgage and loan repayments increase and may drag on overall growth.

How will the tech sector slowdown impact Ireland?

Ireland relies on the tech sector for exports, jobs and tax revenue. Luckily, the negative impacts of the recent slowdown have been modest, with Ireland’s tech sector remaining relatively resilient.

Total layoffs to date in Ireland have accounted for around 1 percent of the sector’s workforce, compared with approximately 1.5 to 2 percent globally.

There’s also a growing fear that the Irish Exchequer is over-reliant on tax from multinationals. To create a buffer against this risk, the government has transferred billions from its October budgetary surplus to a ‘rainy day’ fund. While the government hopes that any feared risks never materialise, its overall approach has been prudent.

Cautious optimism

Ireland’s outlook remains positive in 2023 and beyond, with inflation expected to reduce. However, high prices and rising interest rates are still expected to drag on growth.

There’s a sense of relief among policymakers that many of the pre-winter economic downside risks, such as supply chain disruption, did not materialise. Against the global backdrop of multiple negative risks, it would seem appropriate that the Irish approach is to prepare for a rainy day.