After the uncertainties of the last few years, we’ve learned to approach a new year with caution. However, Graham Reid has given us six reasons to be hopeful about Ireland’s economy in 2023
As we look into the new year, Ireland's economy is relatively well-positioned to deal with the turbulent economic conditions that are persevering from 2022. Strong multinational and technology sectors, robust employment levels, a highly skilled workforce and consistently favourable exchequer returns will give policymakers greater flexibility to respond to the challenges that may lie ahead.
Here are six things we expect to see in the economy in 2023.
1. Lower spending levels due to sustained inflation
Rising costs across the Irish and global economies are eroding consumer and business confidence.
Consumer sentiment in Ireland tumbled in the latter half of 2022, and EY's Future Consumer Index found that 52 percent of global consumers are spending less on non-essential goods.
Rising consumer and business prices are expected to persist into 2023, which is likely to further reduce real disposable incomes, increase interest rates, lower consumer demand, impact business performance and increase costs for investment and capital programmes for both business and Government. These effects will slow activity levels and feed into lower economic growth in 2023.
2. Ireland to remain resilient
Although not immune from the turbulence in the global economy, as a small and open economy, Ireland should be somewhat better placed to deal with a downturn due to a strong combination of factors, including the presence of multinationals, continued inward investment, robust Irish businesses and government investment.
Ireland's sectoral focus on pharma, food, technology and finance and the presence of overseas investment and companies has been a success story of the last two decades. Although the risks are well documented, it has significantly boosted Ireland's exchequer position.
Most importantly, Ireland has a vibrant and growing indigenous business sector that includes large domestic and outbound multinationals and a thriving and expanding entrepreneurial cadre. These businesses are essential to the economy's vitality, providing critical employment and economic activity, fostering entrepreneurship, providing jobs and diversifying our export markets post-Brexit.
Ireland has the benefit of a highly educated and skilled workforce and is now the sole English-speaking, common-law country within the European Union (EU).
3. Policy focus on energy costs and security of supply
As energy costs spiralled throughout 2022, the affordability and reliability of supply issues dominated the political agenda.
The war in Ukraine and rapidly rising energy prices brought the over-reliance on other geographies, and single sources of energy to the fore as countries acted swiftly to expand locations and diversify supply.
The government's role in subsidising costs also came into question as it was deemed necessary to provide households with energy credits to tackle higher bills.
The topic of supply diversification, energy price caps, and the effects of such interventions will span into 2023 and beyond.
4. Investment in critical infrastructure to retain competitiveness
Maintaining competitiveness is essential for Ireland's continued growth story, particularly in attracting investment and talent. For businesses to continue to invest and prosper in Ireland, they will need to attract top global talent to work, particularly when there is a tight labour market and record employment levels.
A buoyant, functioning housing market where people can find suitable accommodation is essential for companies. We know that housing availability can significantly impact our global competitiveness.
This year will see continued investment in improving infrastructure capacity in housing and ensuring adequate supporting infrastructure such as water and energy to accommodate our expanding population. Getting this right will facilitate further economic and population growth while supporting business investment and entrepreneurship.
5. Disrupted transition to net zero
The transition to a green economy has been disrupted due to the ongoing energy and cost of living crises.
Businesses and consumers are refocusing on costs, and there is less appetite to spend more on greener alternatives. However, policy measures to encourage climate-friendly activities and behaviours, such as carbon taxes, become more controversial if they are seen to feed further price increases.
New EU regulations such as the Corporate Sustainability Reporting Directive (CSRD) will emphasise transparent corporate reporting and set a higher standard on environmental, social and governance (ESG) practices.
Government policy in 2023 will have to carefully balance the need for decisive action on climate action and the mounting costs pressures on households.
6. Accelerated digitalisation agenda
Digitalisation is a global trend we can expect to gather further pace in 2023.
We will see more data-centricity, tech transformations and the rise in the use of artificial intelligence to solve business issues, manage costs, help with sustainability challenges and deliver long-term value.
The Irish Government's National Digital Strategy (NDS), launched in 2022, aims to "drive a step-change in the digitalisation of businesses, in particular, SMEs, to sustain Ireland's attractiveness as a location for leading digital enterprises." Taking advantage of the presence of a strong tech sector in Ireland, and becoming a leader in digitalisation and innovation, will put us on a solid global footing for continued investment and economic growth in the years ahead.
Graham Reid is Partner and Head of Markets at EY Ireland.
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