Irish economy to contract this year as exports and investment shrinks

OECD has warned that Ireland's 'substantial' exposure to global risks could further weaken trade and government revenues

Modified domestic demand (MDD) - which excludes multinational activity and gives a more accurate account of the domestic economy - will decline sharply from 9.7% to 2.1% at the end of this year. Pic: Larry Cummins

Weaker exports coupled with a drop in investment will see the Irish economy decline for the first time since the financial crisis, with GDP set to fall by 0.6% in 2023. 

In its latest global outlook report published on Wednesday, the Organisation for Economic Co-operation and Development (OECD) warned that heightened global uncertainties, a weaker trading outlook and higher interest rates will have a downward effect on Irish exports and investment levels, which have already fallen dramatically in the first half of this year. 

Irish investment dropped by more than 16% in the first three months of this year, recovering only slightly to 5.2% in the following quarter. Similarly, exports have fallen consecutively in the first half of 2023, dropping by 1.5% and 4.1% in the first and second quarter respectively, driven by a sharp decline in medical and pharma products. 

With inflation set to remain over 5% in 2023, the OECD assured that price pressures will subside in the next two years, calming to 2.6%, with GDP growth projected to pick up to 2.4% in 2024 and 2.9% in 2025. 

Modified domestic demand (MDD) - which excludes multinational activity and gives a more accurate account of the domestic economy - will decline sharply from 9.7% to 2.1% at the end of this year, before falling again in 2024 to 1.7%, the OECD has said.

Substantial risk exposure

The organisation has also highlighted Ireland's "substantial" exposure to global risks, warning that further geopolitical tensions and growing uncertainty could could put further downward pressure on exports and government revenues. 

While tax receipts are set to remain strong, the OECD has warned that ensuring long term fiscal sustainability is needed to meet Ireland's "investment-intensive ageing, housing and climate challenges."

The report welcomed the Irish Government's allocation of windfall taxes into long-term saving accounts, however, it has called for a stricter adherence to the 5% spending rule, which the OECD said Ireland will continue to breach in 2024.

The OECD noted gains in private consumption and stronger real income following an easing of inflation, which will "pave the way" for a pick-up form mid-2024, and while Ireland remains heavily exposed to global risks, the report said faster disinflation would boost business investment, with stronger-than-expected growth in the United States leading to increased exports.