Ireland's economy will be sluggish in 2024 if forecasts prove true

Ireland’s GDP dropped by 1.9% between July and September, the fourth quarter in a row where a contraction was recorded

Government faced criticism over its expansionary Budget 2024, which breached its own spending rules by increasing expenditure by more than 5%.

This year has been a difficult period for many in Ireland with inflation remaining quite high through most of the year leading to further interest rate hikes, hurting borrowers and the economy, slowing pushing the country into recession — at least on paper.

Economic indicators towards the end of 2023 have been pointing towards an overall economic slowdown following an initial increase during the post-pandemic recovery with many expecting those trends to continue into 2024.

According to the latest available data, Ireland’s gross domestic product (GDP) dropped by 1.9% between July and September marking the fourth quarter in a row where a contraction was recorded.

As a result of all of this, the Irish economy is technically in recession.

GDP is heavily influenced by the actions of the numerous multinational companies based here with sectors dominated by these companies — particularly pharmaceutical companies — seeing a decline of 3.8% during this period with exports dropping by 2.1%.

However, GDP is not the preferred metric for measuring the Irish economy but other indicators are not as positive either. Modified domestic demand (MDD) — which strips out the activity of multinationals to get a better picture of the domestic economy — was flat during the third quarter.

ECB president Christine Lagarde has pushed back at suggestions of a rate cut early next year. Picture: Michael Probst/AP

On the other hand, inflation is slowing — with the annual rate standing at 3.9% in November — driven largely by a drop in energy prices.

So these are among the headwinds that various economic institutions and research bodies will have to contend with as they make their economic forecasts into next year.

The Central Bank of Ireland is expecting GDP to contract for the entire year in 2024 as the transmission of higher interest rates from the European Central Bank “weigh on growth” which is already limited by capacity constraints chiefly because of a really tight labour market.

However, it expects a rebound in the pharmaceutical and information and communication technology (ICT) manufacturing sectors in 2024 along with a recovery in exports.

While the outlook for GDP is negative, MDD will likely grow, albeit at a slow pace. It is forecast to grow by 1.5% this year, 2.5% next year, by 1.9% in 2025, and by 2% in 2026.

The Economic and Social Research Institute (ESRI) said while there has been a contraction in GDP this year, the performance of the economy is still strong. It anticipates the economy to grow again next year.

However, the ESRI warned that the economy is still at risk due to dropping levels of investment including in the commercial property sector.

The Government’s economic projections into 2024 are similar to the Central Bank. According to forecasts contained in Budget 2024, MDD is expected to grow 2.2% with consumer spending — the largest component of MDD — expected to grow by 3.2%.

However, the Government is more optimistic than the Central Bank that GDP will recover, forecasting growth of 4.5%.

The Government, the ESRI, and the Central Bank are all forecasting that inflation will continue to drop next year.

The Government and the ESRI are projecting it to fall to 2.9% with the Central Bank being more optimistic at 2.3%. The ECB’s target is to get inflation down to 2% over the medium-term.

Since the budget, the Government has been receiving criticism by both the Irish Fiscal Advisory Council as well as the ESRI for breaching its own expenditure rules for next year. Both groups warned that the expansionary nature of the budget will add to inflationary pressures.

The government’s spending rule limits net expenditure growth to 5% per year.

The Ifac said poor budgeting could overheat the economy which is already performing above capacity.

The budget package in total was about €12bn, in line with other post-covid packages. However, it is about three times larger than pre-covid budget packages, which typically amounted to €3bn to 4bn.

Ifac said the various measures announced in October’s budget could add between 0.5% and 1.8% to inflation over the coming years.

All these forecasts and projections are predicated on there being no economic shocks to contend with next year. However, there are still numerous risks that could present themselves over the course of 2024 which could impact the economy.

One of the foremost in people’s minds would be the risks associated with geopolitical tensions and conflicts, and the uncertainty they bring.

The horrible toll of the Israel-Gaza war has not been felt by people in Ireland nearly as much as the war in Ukraine was. Energy prices have continued to fall since October and inflation continues on its downward trend.

While the war could have some impact in the weeks and months ahead, it is still unclear. However, this just serves to highlight how fast these conflicts can spring up and the uncertainty that can follow in their wake.

In Ireland specifically, issues arising that could impact the pharmaceutical and tech sectors in particular could pose a problem. These are sectors which contribute a significant amount of corporation tax to the Exchequer and any downturn could have significant ramifications for Ireland’s finances going forward.

The Government is also projecting a surplus of €8.4bn in 2024 based largely on high levels of corporation tax expected to come in over the next few years.

In recent months, concerns were raised as corporation tax receipts declined for the three months up until October.

This was mitigated by a record haul in November of €6.3bn. November is an important month as it is when the Government collects an outsized share of all its annual revenues from three major tax sources.

Another risk identified by the Central Bank was changing monetary policy to something that was not anticipated, however, it is widely expected that the ECB will cut rates at some point during 2024.

Inflation has been declining through most of this year with the ECB deciding in the last few months to pause interest rate hikes as a result.

Last week, Christine Lagarde warned that inflation across the eurozone could likely edge higher this month for a number of reasons.

One of the reasons include the fact that some European governments are set to remove cost-of-living subsidies such as energy utility bills which could increase inflation.

The ECB has also repeatedly pushed back against suggestions it would cut interest rates as early as March next year.

However, the Central Bank has warned that in light of the “larger than anticipated monetary policy effects” through higher interest rates, the Irish economy could see more “slack in the labour market” than currently projected and a “somewhat slower” catch-up in real wages.

It said this would “negatively affect domestic demand and reduce inflation more than anticipated”.

While all these forecasts are based on the best available data at this moment — predicting exactly where the economy will go next year is not possible.

In Budget 2022, the Government predicted GDP to grow by 4.7% and not the four quarters of contractions that we got. MDD was projected to be around 1.2% — which is close as it has been mostly flat this year.

The Central Bank made similar projections towards the end of 2022 — GDP was supposed to be up 5.3% and MDD up 2.3%.

However, if next year’s forecasts do prove to be reasonably accurate, then it is looking like the economy is set for a sluggish 2024 at least.