Quarterly Economic Commentary, Winter 2023

Forecast Overview:

• While the underlying Irish economy as measured by modified domestic demand (MDD) continues to grow, it is clear that external sources of growth are slowing somewhat.
   
• Global conditions continue to moderate as households and firms in most Western economies are facing elevated costs of finance through higher interest rates.
   
• This has implications for the domestic economy given its small and open nature. However, the moderating impact on the Irish economy is compounded by the slowdown in growth rates experienced by sectors which have been central to the recent strong growth performance.
   
• Exports and investment levels in the domestic economy, for example, have registered negative growth rates in recent quarters principally due to the slowdown in multinational-related activities.
   
• Despite this, MDD is still growing at a consistent rate of approximately 0.6 per cent, and other indicators such as Exchequer receipts and the labour market variables all indicate resilient domestic growth. We expect MDD to grow at an average of 2 per cent in 2024.
   
• The recent Budget was a sizeable package with an additional expenditure level of approximately €14 billion being outlined for the coming year. While there were elements in the Budget which were laudable, overall the package was quite stimulatory and would have benefitted from being more targeted in nature.
• This is particularly the case given the persistence observed in the rates of CPI inflation. We now forecast that inflation will be 6.4 per cent in 2023 before falling to a still elevated rate of 2.9 per cent in 2024.
   
• A Special Article to the Commentary by Doorley et al. presents the annual distributional review of the impacts of the Budget. Doorley et al. conclude that the Budget left households across the income distribution better off by just over 2 per cent, with the lowest income quintile benefitting the most by 5 to 6 per cent of disposable income. They also note that policymakers should move away from the use of temporary measures to compensate households for the presence of inflation.