Irish economy expected to shrink this year for first time in over a decade

The State’s economy is expected to contract this year for the first time in over a decade as multinational exports weaken in the face of a global slowdown, according to the European Commission.

Having been the fastest-growing economy in Europe for several years, Ireland’s export-led economy has been adversely hit by a fall-off in demand in international markets linked to higher interest rates and ongoing inflationary pressures.

In its latest set of forecasts, the commission predicts the economy here will contract by 0.9 per cent in gross domestic product (GDP) terms this year before growing by 3 per cent in 2024 and 3.4 per cent 2025.

The contraction would come on the back of 9.4 per cent growth last year and over 15 per cent in 2021. The Republic is one of just seven EU economies, including powerhouse Germany, expected to the contract in 2023.

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“Ireland’s real GDP growth weakened significantly in the first half of 2023 to a modest 0.1 per cent increase year-on-year, much lower than previously expected,” the commission said, noting the slowdown was mainly influenced by a few key sectors dominated by mostly export-oriented multinationals.

The “shifts within certain multinational-dominated sectors along with lower external demand have been weighing on exports,” it said.

The commission expects modified domestic demand, a more accurate measure of domestic conditions, to continue to grow but at a more modest pace. Inflation here is forecast to average 5.3 per cent in 2023 before moderating to 2.7 per cent in 2024 and 2.1 per cent in 2025.

The commission also warns that while Ireland’s general government budget balance is expected to remain in surplus in 2023, it will decrease to 0.9 per cent of GDP from 1.7 per cent in 2022 “due to a larger increase in expenditure than revenue”. In 2024, the surplus is forecast to shrink further to 0.6 per cent of GDP before rebounding to 1 per cent in 2025.

The commission expects the euro area as a whole to grow in 2023, avoiding a technical recession as some commentators had been predicting, but expanding more slowly than previously forecast.

The EU executive arm has cut the growth forecast for the 20 countries sharing the euro for 2023 to 0.6 per cent from the 0.8 per cent expected in September because high inflation, rising interest rates and weak external demand took a heavier toll than expected.

“Following a robust post-pandemic expansion in 2021 and 2022, the EU economy has lost momentum,” it said.

“Real GDP contracted very mildly in the fourth quarter of 2022 and barely grew in the first three quarters of this year,” it said, noting a high cost of living took a heavier toll than expected.

“On the external side, global trade provided little support. Meanwhile, the response of monetary policy to high inflation is working its way through the economy, and fiscal support is partly being phased out,” the Commission said.

On the upside, it said growth will already start to pick up in the last three months of this year with GDP up by 0.2 per cent quarter-on-quarter after a 0.1 per cent contraction in the July-September period. Overall in 2024 growth is likely to be 1.2 per cent, accelerating to 1.6 per cent in 2025.

“Economic activity is expected to gradually pick up as consumption recovers on the back of a steadily robust labour market, sustained wage growth and continued easing of inflation,” it said. “Despite tighter monetary policy, investment is projected to continue increasing, supported by overall solid corporate balance sheets and by the Recovery and Resilience Facility.”