Dual economy in focus: domestic growth continues to be robust while multinational activity slows

The Irish domestic economy looks set to continue to grow in 2023 and into 2024. However, owing to the disproportionate impact of the multinational sector on headline economic data, it is a somewhat nuanced outlook. We expect GDP, which is very heavily influenced by the Multinational Enterprise (MNE) sector, to contract this year by 1.6 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 1.8 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.

Inflation is still exerting a negative impact on the Irish outlook. While the pace of price increases has been declining on a persistent basis to its present rate, we still expect the Consumer Price Index (CPI) to increase by 6 per cent in the present year and 3.2 per cent in 2024. This represents an increase on our previous forecast as inflation rates have not declined as rapidly as we previously expected.

While the economy is experiencing slower rates of growth, the Irish labour market continues to perform robustly, with unemployment stabilising at approximately 4 per cent over the past year. Notwithstanding, the moderation in activity domestically and the slowdown in international trade, the domestic Irish economy is presently operating at capacity, in particular in relation to employment intensive sectors like construction.

In this environment, additional domestic pressures are likely to feed through to prices in the short term. However, targeting expenditure towards addressing infrastructure bottlenecks and improving the productive capacity of the economy can alleviate capacity constraints in the medium term.

Commenting on the report, author Prof Kieran McQuinn of the ESRI stated: “The Irish economy, while operating near enough to full capacity, does look set to experience more moderate rates of growth over the short to medium-term.”

Commenting on the report, author Dr Conor O’Toole of the ESRI stated: “As energy prices have eased, inflation has dropped relative to last year. However, these declines have stalled in recent months as the domestic economy continues to grow. This is going to present challenges to policymakers attempting to contain cost of living pressures.”