Persistent pace of growth in the domestic economy

June 27, 2024

Macroeconomics
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Although the Irish economy contracted in 2023 due to a decline in headline exports, we anticipate moderate growth in both headline and underlying indicators in 2024 and 2025. Therefore, 2024 is likely to see a closer alignment between headline indicators and those measuring domestic economic performance. This outlook is supported by a positive international environment, quicker-than-expected disinflation, potential interest rate declines, and a robust labour market. We expect GDP, heavily influenced by the MNE sector, to grow by 2.5 per cent this year and 3.2 per cent in 2025.

Modified domestic demand (MDD), which is a more accurate measure of underlying Irish economic performance, witnessed a more moderate pace of growth in 2023 mainly because of lower rates of investment. For 2024 we expect MDD to grow by 2.2 per cent and by a further 2.9 per cent in 2025.

Overall, the pace of inflation is continuing to decrease. Compared to the higher inflation in many other European countries, Harmonised Index of Consumer Prices (HICP) inflation in Ireland is relatively low. This, in combination with increasing nominal wages, has led to real wage growth for the first time in two years. We expect Consumer Price Index (CPI) inflation to increase by 2 per cent in 2024 and to drop below 2 per cent in 2025. Accordingly, given increases in nominal wages, we expect real wages to grow by 2 per cent in the current year and 3 per cent in 2025.

The Irish labour market remains strong, with employment surpassing 2.7 million workers for the first time in modern history and unemployment standing at 4 per cent. This suggests that the labour market is operating at full capacity, with limited potential for further growth in the absence of inward migration. We expect unemployment to be 4.1 per cent in 2024 and 4.0 per cent in 2025.

Risks to the domestic outlook include potential geopolitical shocks in both Europe and Asia. Another risk is maintaining investment levels in the presence of certain capacity constraints.

Commenting on the report, author Kieran McQuinn of the ESRI stated: “For the first time in two years, Irish households will see an increase in real wages in both 2024 and 2025. This will support increased consumption levels in the domestic economy."

Commenting on the report, author Conor O’Toole of the ESRI stated: “Ireland’s economy is likely to benefit from a more benign international outlook and a robust domestic performance. A main challenge will be addressing capacity constraints through investment without adding to price pressures.”