:quality(70)/cloudfront-eu-central-1.images.arcpublishing.com/irishtimes/A7SOYLPRVJGULE3UL4RZ5ATNWY.jpg)
The latest forecasts by the Economic and Social Research Institute (ESRI) point to a slowdown across the economy. This is driven in large part by a decline in exports from the multinational sector, but consumer spending is also now under pressure. Growth is expected to recover somewhat next year, but at a more moderate level.
The headline GDP figure shows the first decline since 2012. This figure is heavily distorted by multinational accounting and is of limited use in terms of the Irish economy. Nonetheless the fall in exports is significant; some of this is due to the Covid-bounce in the pharma sector running out of steam, while some is due to the impact of slower international growth on Irish companies. Investment growth is expected to weaken too.
The domestic economy has bounced back strongly from the Covid-19 lockdowns too, but here the cost-of-living crisis and higher interest rates are taking their toll. The ESRI has cut its forecast for modified domestic demand growth to 1.8 per cent this year and expects this growth rate to rise to 2.4 per cent next year. Unemployment is expected to remain low.
The ESRI anticipates that the public finances will remain in strong surplus, though the more moderate outlook for growth will in time feed through to tax revenues. The forecasters point to the November tax figures as being crucial this year to determine whether the rapid growth in corporation tax will continue – the latest figures for September showed some further weakness.
:quality(70)/cloudfront-eu-central-1.images.arcpublishing.com/irishtimes/LMR5CDWAYCZLFCH4HY5VNSSS2E.jpg)
:quality(70)/cloudfront-eu-central-1.images.arcpublishing.com/irishtimes/L7GWKYUFDPWBNZUFV72FDIG6WU.jpg)
:quality(70)/cloudfront-eu-central-1.images.arcpublishing.com/irishtimes/HK6L5RH32NCG5H7G5X6XQQBXMY.JPG)
:quality(70)/cloudfront-eu-central-1.images.arcpublishing.com/irishtimes/LTT5FFPJPFC5NFAWXIWWESAGXU.jpg)
The increasing evidence of the economy entering into more normal growth rates is an important message for the Government ahead of next week’s budget. This comes as the economy is operating at or close to full capacity. As the ESRI points out, this presents a tricky backdrop to the budget. The Government needs to continue to spend on investment, it points out, but has to be careful not to add fuel to inflation, which is falling but remains stubbornly high. The institute’s researchers warn that spending growth ahead of the previously signalled 5 per cent limit might be justified to tackle shortages in areas like housing, but not for a generalised rise in spending which could be inflationary.
Meanwhile, a longer-term warning has come in a useful new piece of research from the Irish Fiscal Advisory Council, the budget watchdog. It looks at the costs of climate change in the years ahead in terms of Government spending and taxes, where the ending of tax on fossil fuels means a very significant hit. The message is that very significant costs lie ahead here, which need to be factored fully into Government planning.
This is a reality which Irish politics has yet to face up to, along with the costs of an ageing population. Higher taxes inevitably lie ahead to help pay the bills.