ESRI: Economy to slow as elevated inflation persists

Kieran McQuinn, research professor at ERSI, said the Government has a "very fine balance” to strike between infrastructure spending and not adding fuel to inflationary pressures. Photo: Sasko Lazarov/Photocall Ireland

Growth in the Irish economy is expected to slow as inflation persists through the rest of the year and multinationals see a drop in exports, but domestic demand is expected to remain robust, the Economic and Social Research Institute (ESRI) has warned.

As Finance Minister Michael McGrath prepares to present his budget for 2024 next week, the ESRI have issued their latest quarterly economic commentary which finds the Government finances in a healthy state.

The ESRI is predicting a general Government surplus of €8bn for this year followed by €13.2bn next year. This has been revised down slightly from their summer commentary which forecasted €9.8bn and €15.5bn respectively.

However, it is forecasting that Ireland’s GDP — a measure which is heavily weighted towards multinationals — is to contract by 1.6% this year before growing again by 3.5% in 2024. The reduction is due to “notable contractions” in exports in areas dominated by multinationals such as pharmaceuticals and machinery related to semiconductors.

This, coupled with higher imports, has put downward pressure on GDP.

However, modified domestic demand (MDD) — the preferred measure of the domestic economy that excludes the activity of large multinationals — is set to grow by 1.8% this year and by 2.4% next year.

“It is now more than likely that the Irish economy will experience more moderate rates of growth going forward,” the ESRI said.

Inflation

In terms of inflation, the ESRI said that it has expected it to come down more than it did through the remainder of the year. The latest Consumer Price Index shows annual inflation was running at 6.3% in August.

It is projecting inflation to average at 6% this year before declining to 3.2% next year which is still above the European Central Bank’s medium-term target of 2%.

Conor O’Toole, associate research professor with the ESRI, said inflation appears to be becoming “more ingrained and more broad-based” which he said is more difficult to deal with from a policy perspective.

Kieran McQuinn, research professor with the ESRI, said given inflation remains elevated, the Government has a “very fine balance” to strike next week between continuing investment in infrastructure — such as housing and dealing with climate change — and ensuring “you don't additionally fuel the inflationary pressures that are there”.

“That's why I think it is important that the Government creates the fiscal space for that investment. That it holds the line as far as taxation issues,” he said.

If you start to cut taxes at the same time, that will additionally fuel those inflationary pressures.

On top of inflation, the ESRI is expecting that the tight labour market will persist into next year. The unemployment rate is expected to remain at 4.1% for this year and drop to 4% next year.

With elevated inflation, low rates of unemployment, and high job vacancies, wage pressures are set to continue to build. The ESRI is expecting income growth to run at 4.8% through the rest of the year and at 5.8% in 2024.