Domestic economy continues to grow despite GDP contraction in 2023

Global economic conditions continue to moderate as 2023 comes to an end. While the underlying Irish economy continues to grow, external sources of growth are slowing. Exports and investment levels in the domestic economy have registered negative growth rates in recent quarters mainly due to the slowdown in MNE-related activities. We expect GDP, which is very heavily influenced by the MNE sector, to contract this year by 2.7 per cent. 

This is the first episode of negative GDP growth since 2012; however, the factors determining this outcome are very different. On the other hand, modified domestic demand (MDD), which captures consumption and modified investment, is set to increase by 0.6 per cent in the present year. In the past, GDP has generally tended to overstate the degree of growth in the domestic economy, in the present case, however, it actually understates the degree of activity in the domestic economy.

Overall inflation is beginning to slow, mainly due to the fall in energy prices. Inflation in non-energy related items has proven to be stubborn, but with the fall in energy prices, a slowdown is expected here too. We still expect the Consumer Price Index (CPI) to increase by 6.4 per cent in the present year and 2.9 per cent in 2024. Our forecast for 2023 represents an increase on our previous forecast of inflation as rates have not declined as rapidly as we previously expected.     

The labour market continues to perform robustly, a fact that underscores the resilience of the underlying economy. The employment levels are currently at a historical high. While unemployment has increased since the summer, this reflects an increase in the labour force rather than any sustained fall in employment or weakening in economic activity.

The Irish economy is set to grow at a more modest pace in the period ahead. This reflects the inevitable slowdown in the performance of key MNE sectors such as the Pharma sector and the unwinding of savings built up during the Covid-19 pandemic.

Commenting on the report, author Prof Kieran McQuinn of the ESRI stated: “While headline indicators suggest the Irish economy is set to contract in 2023, the underlying economy is still set to perform robustly this year and into 2024.”

Commenting on the report, author Dr Conor O’Toole of the ESRI stated: “Cost of living challenges have put pressure on many households over the past number of years. In recent months, we have begun to see inflation moderate on the back of energy price declines, and we expect this to continue in 2024.”