ESRI: Ireland's reliance on multinationals leaves the economy open to risks, but recession unlikely

The ESRI’s final quarterly report for the year estimated that inflation will reach around 7.1% next year. Picture: Leah Farrell/RollingNews.ie

Heavy reliance on multinationals has left Ireland’s economy vulnerable to shocks, however a national recession is unlikely, according to new analysis.

Inflation is expected to remain at high levels next year and contribute to an international recession, which will affect Ireland’s open economy and lead to a sharp slowdown in growth. Economic and Social Research Institute (ESRI) research professor Conor O’Toole said: 

We’re not expecting the economy to slip into recession at this point, however the reduction in growth rate is very considerable from 2022 into 2023.

The ESRI’s final quarterly report for the year estimated that inflation will reach around 7.1% next year and, while Ireland may escape recession, there will still be a sharp slowdown in economic growth which will affect lower income households.

“There may be a need for more once off cost measures into 2023 if price pressures persist,” said economics professor with the ESRI, Kieran McQuinn.

Consumer consumption reached almost 6% this year, but is expected to drop to just over 2% next year as shoppers tighten their belts.

“Households will have less disposable income and households on higher incomes may engage in precautionary savings,” said Mr O’Toole.

Decline in housing 

The ESRI report also predicted a decline in housing delivery in 2023, due to high input costs and labour shortages. 

It expects completions to reach around 26,000, which is around 10,000 less than what experts have said is needed per year to tackle the housing crisis.

The housing crisis continues to impact lower income earners, but does not seem to significantly impact employees in multinational companies, said Mr O’Toole.

The ESRI expects unemployment to remain at low levels next year. However, the report found that employment levels have not recovered in all sectors with staff in the food and beverage industry still below pre-pandemic numbers.

Ireland’s economy has been insulated from the challenging economic environment by an increase in household savings and high levels of growth from the information and communications technology and pharmaceutical sectors, the report highlighted.

These two sectors account for around half of all exports out of Ireland.

However, they are under increasing pressure from inflation and rising input costs as well as interest rate hikes, forcing some ICT companies like social media giant Meta to slim down. Mr McQuinn said: 

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.

The ESRI predicted a “major reduction” in investment into the Irish economy next year as the global economy battles headwinds. This was echoed by IDA Ireland in its annual report, which predicted sluggish growth in the second half of 2023.

Government has often relied on corporate tax receipts to provide financial padding in budgets, but Ireland could be set to lose a large chunk of GDP if the volatile international trading environment does not ease next year.

Going forward, the think tank has called for more clarity and transparency around the quantity of corporate tax receipts that are moved into the Government’s rainy day fund.