Austin Hughes: CSO data shows economy is down but is not out

It may not be unreasonable to envisage exports returning to a bumpy but positive growth path next year. Picture: Dan Linehan

Growth data released by the CSO on Friday suggest that economic activity now looks set to be weaker than previously expected for the year with GDP falling by nearly 2% and modified domestic demand growing by about 1%.

Economic growth is on a very weak trajectory at present. In part, this reflects global economic difficulties. It also owes much to technical issues in the multinational sector and, hopefully, temporary issues in the domestic economy.

Importantly, the current weakness in GDP and the more ‘localised’ measure of activity, modified domestic demand presents a much weaker picture of demand in the economy at present than some other indicators, with numbers at work set to increase by about 3.7% in 2023.

Overall, in spite of the data, the broad picture is likely to be one of very mixed circumstances but marginally positive momentum.

The pull-back in GDP growth largely reflects ongoing fallout in the wake of the pandemic that initially prompted outsized increases in pharma and tech-related activity (which drove 15.1% GDP growth in 2021 and 9.4% growth in 2022) and is now experiencing a ‘rightsizing’ correction.

While it is not possible to be definitive about the scale and duration of this adjustment, business imperatives would suggest that most of the rescaling of output should now be in place, although any decisive turnaround may still be some time away. On this basis, it may not be unreasonable to envisage exports returning to a bumpy but positive growth path next year.

Recent months have seen a drop in energy prices leading to a marked easing in inflation in Ireland and elsewhere. Barring some geopolitical development that reverses the trend in energy costs, this also means that next year should see interest rates reverse the trend of this year and move decisively downwards from the spring.

As a result, consumer sentiment and spending power should improve leading to a pick-up in domestic demand. With a little good fortune with supply constraints, residential construction could also make a significant contribution to growth next year with up to 34,000 dwelling completions possible.

A likely increase in consumer spending of about 3.5% this year appears consistent with buoyant jobs growth and substantial fiscal supports but it seems a good deal stronger than might be suggested by retail sales and some other domestic indicators.

A strong consumer also seems at odds with the messaging of domestic facing businesses where many appear to be facing significant difficulties. We see consumer spending growing at a similar pace next year but in a manner that may be more evident in its domestic footprint.

Geopolitical uncertainties make for an almost unpredictable external backdrop next year . Most forecasters envisage another difficult year for global economic activity. However, an easing in cost-of-living pressures, coupled with a more ‘normal’ performance of the multinational sector could see GDP and modified domestic demand increase around 3% next year.