The Irish economy will experience a sharp slowdown in growth next year as high inflation erodes the value of earnings and recessions in other countries dampen the State’s export trade, two high-profile reports on the economic outlook here have warned.
Despite the headwinds, the economy is expected to avoid an outright recession, defined as back-to-back quarters of negative growth, with multinational exports and consumer spending continuing to fuel a modest expansion in activity.
In its latest quarterly bulletin, the Economic and Social Research Institute (ESRI) said an international recession coupled with the persistence of cost-of-living pressures meant that the Irish economy would grow at “a significantly reduced pace”.
It said growth, as measured by modified domestic demand (MDD), would fall from 8.4 per cent this year to just 2.2 per cent in 2023 while inflation would average just over 7 per cent for the year as a whole, a higher rate than it predicted previously.
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In a separate report, the Organisation for Economic Co-operation and Development (OECD) predicted that falling real incomes due to inflation would hold back consumer spending in 2023, despite significant wage growth.
At the same time, high costs and low confidence would reduce companies’ incentives to invest. The Paris-based OECD predicted headline growth would be just 0.9 per cent next year.
The agency said the reopening of the Irish economy after Covid had triggered a strong bounce-back in activity, but inflationary pressures have emerged since then.
Irish GDP is now a “mind-boggling” one-third bigger than it was before the pandemic and modified domestic demand is more than 9 per cent greater, Vincent Koen, deputy director of the country studies branch of the OECD economics department, noted at an event at the Institute of International and European Affairs (IIEA) in Dublin.
“I can’t think of any other OECD country in this league,” Mr Koen said of the Irish GDP, which the Government estimates will amount to almost €500 billion this year and has been underpinned by multinationals based in the State.
In its report, the ESRI warned that investment levels would moderate on the back of increased costs and higher interest rates, in particular, impacting the supply of housing.
It forecast that while approximately 28,000 dwelling units would be completed in 2022, completions would fall back to 26,000 in 2023, as labour scarcity and cost inflation impact the construction sector here.
The think tank also took aim at the Central Bank’s recent decision to loosen its mortgage lending rules, describing it as “somewhat surprising” when house price inflation has been in double-digit territory and interest rates are rising.
The OECD also warned that Government schemes to help first-time buyers, such as the shared-equity scheme and the Help to Buy incentive, may be inflating house prices, at least in the short term.
Both reports came as Central Statistics Office (CSO) showed that property prices nationally rose by 9.8 per cent in the year to the end of October, extending the pattern of deceleration seen in recent months, which analysts have attributed to cost-of-living pressures and higher interest rates. This is the first time the growth rate has been in single figures in 14 months.
Outside Dublin, the growth rate remained above the State-wide average, at 11 per cent, while the rate of price growth in the capital fell to 8.3 per cent.
