ESRI: Rising real wages to be one of the main drivers of economic growth 

Domestic economy expected to grow 2.3% this year and 3.1% next year

The ESRI expects real wages to grow by 2.4% this year and by 3.5% next year. 

With inflation continuing to slow, Irish workers can expect their real wages to grow by over 3% next year, with rising incomes expected to be one of the main reasons for economic growth going forward, a new report from the Economic and Social Research Institute (ESRI) has found.

These comments come ahead of the budget next week, where Finance Minister Jack Chambers is due to announce a €8.9bn package — of which €1.4bn has been earmarked for tax measures, with the remainder going to spending increases. 

In its latest quarterly economic commentary, the ESRI said one of the main reasons for the continued growth in the Irish economy, this year and next, is due to the forecasted increase in real wages. 

“We expect real wages to grow 2.4% in 2024 and by 3.5% in 2025,” the ESRI said, adding these increases signify a “recovery in household purchasing power” amid the ongoing decline in inflation.

Consumption expenditure is expected to increase by 2.3% this year and 2.7% next year on the back of people's rising real incomes.

Inflation hit 1.7% in August, the first time it has been below 2% since June 2021. 

The ESRI said it now expected inflation to average out at 2.3% this year and 1.2% next year.

In its economic forecast, the ESRI said modified domestic demand — a measure of economy that strips out the activity of the multinational corporations based here — will grow by 2.3% through the whole year and by 3.1% next year.

GDP — which takes into account multinational activity — is expected to contract by 0.4%, before growing by 2.5% next year.

The ESRI said the overarching factors shaping the outlook for the Irish economy were quicker than expected disinflation, the likelihood of further interest rate cuts, and the robust labour market. 

It said the labour market continued to perform in a “very strong manner”, with the unemployment rate set to “converge back to 4% over the next year”, which it said was “quite remarkable” given the significant increase in population.

“Much of this increase is coming about through increased net migration,” the ESRI said.

In advance of the budget next week, the ESRI said Irish public finances appeared to be in a “robust state”, with surpluses expected both this year and next.

However, risks around windfall corporation tax remain, without which the exchequer would be recording a deficit.

In relation to the housing market, the ESRI said it was “crucially important” implementation of the proposed residential zoned land tax proceeds immediately.

The rate of this tax is 3% of the market value of the land, which is to self-assessed by the landowner.

The tax is supposed to be introduced from February 1 but there have been arguments within Government, with certain ministers seeking another deferral. 

The ESRI argues addressing land prices is arguably the only way policymakers can significantly reduce the cost of supplying a house.

“By addressing possible land hoarding, the price of land can be targeted, thereby potentially reducing a cost of production which, typically, accounts for approximately 15% to 20% of the cost of a residential unit,” the ESRI said.