Economy continues to grow amid global uncertainty
The Irish economy is expected to grow into 2025 with the domestic sectors performing particularly well. Modified domestic demand (MDD), an accurate measure of underlying Irish economic performance, is expected to grow by 3.2 per cent in 2024 and increase to 4.1 per cent in 2025. The positive outturn is driven by increases in real incomes, strong labour demand and higher housing investment in 2025. In a Box in the Commentary, Egan and McQuinn assess the sustainability of recent house price growth following continued price increases in 2024. They find that while most indicators of vulnerability are low, households with higher leverage burdens are vulnerable to any labour market shock.
We anticipate that GDP, largely driven by activity in foreign-dominated sectors, will experience an overall contraction of -1.1 per cent in 2024. We expect a rebound in 2025 with a growth rate of 4.5 per cent, driven by higher exports and investment.
However, the outlook for 2025 for the traded sector is highly uncertain because of proposed policy changes by the incoming US administration. Proposed tariffs could lower global trade and have both a direct and indirect effect on Ireland. Changes to taxation policy could adversely affect Irish corporation tax receipts. A Box in the Commentary by Fitzgerald assesses US Foreign Direct Investment in Ireland. He finds that US multinationals play a much greater role in the Irish economy than in the EU as a whole, suggesting that potential policy changes could have a big impact.
Overall, the rate of inflation continues to decline. With nominal wages also expected to grow, this will lead to higher real wages. We expect Consumer Price Index (CPI) inflation to rise by 2.1 per cent in 2024 and just 1.0 per cent in 2025.
The Irish labour market remains robust, with the unemployment rate projected to remain close to 4 per cent over the next year. Employment numbers continue to increase and we expect it to exceed 2.8 million in 2025.
Budget 2025 had a welcome commitment to increase investment in the Irish economy. However, future spending commitments may have to be revised if the effects of changed US trade or taxation policy are large and materialise rapidly.
Commenting on the report, author Kieran McQuinn of the ESRI stated: “While 2024 saw another strong performance for the Irish economy, it would be prudent in 2025 to prepare for some significant challenges both to international trade and the domestic public finances.”
Commenting on the report, author Conor O’Toole of the ESRI stated: “The domestic Irish economy is continuing to perform well with low unemployment, falling inflation and increasing real wages. However, there are considerable downside risks, focused on policy changes by the incoming Trump presidency which could notably impact trade, FDI and the public finances.”