Quarterly Economic Commentary, Autumn 2023

Forecast Overview: 

• While the Irish economy emerged in a strong and resilient manner post the COVID-19 pandemic, it now looks set to experience more moderate, normalised, rates of growth. 
• International economic activity is contributing to this slowdown; inflation remains elevated, interest rates have continued to increase, and demand in countries such as Germany and, in particular, China, has faltered. 
• Typically, developments in the multinational (MNE) sector tend to overstate underlying domestic growth in the Irish economy. However, at the present time, we believe modified domestic demand (MDD) – a more accurate reflection of domestic activity – is growing at 1.8 per cent in 2023, while GDP is set to decline by 1.6 per cent.
• Notwithstanding the normalising activity domestically and the slowdown in international trade, the domestic Irish economy is currently operating at capacity, in particular in relation to employment intensive sectors like construction.  The Irish labour market continues to perform robustly, with unemployment stabilising at approximately 4 per cent over the past year, indicating the economy is close to, or at, full employment.  
• 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. 
• With increased construction costs and rising interest rates, challenges facing the housing market continue. Many of the issues in the housing market can be traced back to the Great Financial Crisis (GFC). A Box to the Commentary estimates how house prices would have evolved if supply had increased at a much more vigorous pace post-2010 than was actually the case. 
• Inflationary effects appear to be broadening and the direct impact of initial energy prices has subsided. Given this changing context for inflation, it increases the likelihood of domestic sources predominating and inflation becoming more engrained as second round effects occur. The CPI for 2023 and 2024 is forecast to be 6.0 per cent and 3.2 per cent, respectively.
• The high intake of tax revenue continues to be driven by income tax, VAT and corporation tax. Included in the public finances section are two Boxes: the first examines how the composition of tax revenue in Ireland has changed historically; the second seeks to highlight historical trends in Irish State expenditure and to examine Irish expenditure across countries.