Anthony Foley: Irish economy to grow at slower rate than we got used to in recent years
The big positive for the Irish economy in 2024 will be the continued, and surprising, strength of the labour market.
The Irish economy will expand this year but at much lower growth rates than the exceptional performances of recent years — and even this outlook depends on global conflicts and interest rate cuts.
There were notable downward revisions for GDP growth in 2023 as the year progressed. A year ago, the Economic and Social Research Institute, or ESRI, had forecast the economy would grow last year by 3%. By last month, the ESRI had predicted GDP would contract by 2.7%.
The pattern was repeated by the Central Bank. In December 2022, the bank projected GDP would grow by 5.3% in 2023, which by the end of the year was cut to a contraction of 1.3%.
The weaker output performance in 2023 was mainly due to lower overall exports and investment levels, partly due to the return of pharma exports to more normal levels after the pandemic, and was also due to the negative direct and indirect effects of high global interest rates.
Personal consumption performance went in the opposite direction: Both the ESRI and Central Bank predicted stronger spending outcomes in 2023 as the year progressed.
A more appropriate indicator for Ireland's economy is, of course, modified domestic demand, or MDD. The ESRI had over the year cut its 2023 growth forecast for MDD to 0.6% from 2.2%, while the Central Bank cut its forecast to 1.5% from 2.3% under the same measure.
Meanwhile, the labour market performed surprisingly well, with the ESRI and Central Bank forecasts for unemployment remaining benign, while the Central Bank cut its inflation forecasts through the year.
Between 2017 and 2022 the Irish economy grew by an annual average of 8.9% in volume GDP terms, and by 4.6% on the more appropriate indicator of the Modified Gross National Income measure.
So what to make of all this? Some parts of the international economy will perform a little better in 2024. The Organisation for Cooperation and Development expects the world economy to grow 2.7% this year, slower than the 2.9% expansion in 2023.
According to the European Central Bank December projections, GDP in the eurozone will grow 0.8% this year, up from 0.6% in 2023. Eurozone imports will grow at a moderate rate to help boost demand for Irish exporting companies, however, the US economy will grow less in 2024 than in 2023, the ECB forecasts.
Interest rates this year are expected to decrease and consumer price inflation in Ireland is expected to decline to below 3%. Lower interest rates will in time support moderate growth in investment, and the "labour market miracle" will continue.
However, if European inflation does not slow, as currently expected, the ECB will be slow to cut interest rates, affecting the Irish economy.
Geopolitics affects trade and supply chains and lowers business and consumer confidence. The war in Ukraine, tensions in the South China Sea, and the new protectionist tendencies show no signs of being resolved, while the risks have intensified from the Israel-Hamas conflict.
And elections this year in Taiwan and the US could likely add to global tensions.
My overall assessment is this: The big positive for the Irish economy in 2024 will be the continued, and surprising, strength of the labour market.
Unemployment will increase slightly but should stay below 5%, and employment levels will continue to increase. Other positive possibilities include the continued decrease in the inflation rate and the associated reduction in interest rates.
However, interest rate reductions are unlikely to occur early in the year and will be very gradual when they do appear.
The international economic environment in 2024 gives limited solace to a small open economy such as Ireland. Geopolitics will weigh on economic activity and we can expect low growth rates across the GDP measure, the modified measure, and under the MDD measure, of about 2.5%.
That's an improvement on 2023, but by less than we had got used to in recent years.
- Anthony Foley is associate professor emeritus of economics at Dublin City University Business School
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