Recession risks amongst Ireland’s main trading partners, persistent cost-of-living pressures and interest rate increases to reduce Irish economic growth

The pace of growth in the domestic economy has been slowing throughout 2022 as prospects of an international recession and growing uncertainty in the global economy have increased. 

While export growth has provided an exceptionally strong stimulus to economic growth over the past number of years, the international challenges in key sectors such as ICT add to the downside risks facing the Irish economy. This is particularly the case due to increasing concentration risk in the domestic economy that is highlighted in a box to this commentary.

The Irish economy displayed a remarkable degree of resilience in 2022. Our forecast for Modified Domestic Demand (MDD), the more accurate measure of domestic economic activity, is for growth of 8.4 per cent this year on the back of strong investment and consumption growth. In the labour market, the unemployment rate has fallen to a near historical low of 4.4 per cent in Q4 2022 and we anticipate employment to remain strong throughout 2023. Due to the strength of exchequer receipts and corporation tax revenue in particular, we now anticipate a significant surplus in the Government Balance for this year and next. 

However, several challenges face the domestic economy in 2023. Recession risks amongst Ireland’s main trading partners, persistent cost-of-living pressures and increases in monetary policy interest rates means that the Irish economy is set to grow at a significantly reduced pace in the near-term. We now anticipate inflation to average 7.1 per cent in 2023 and expect modified domestic demand to increase by just 2.2 per cent in 2023.

Commenting on the report, author Kieran McQuinn of the ESRI stated: “The significant challenges confronting the Irish economy in 2023 means inward foreign direct investment must continue to be supported given its importance to the domestic economy.”

Commenting on the report, author Conor O’Toole of the ESRI stated: “Cost of living pressures for households and higher input costs for businesses are likely to dampen the growth prospects for Ireland in the coming year. While the government has room to manoeuvre from a fiscal perspective, considerable care will be needed to ensure any policy response is tailored and targeted.”