That Economic and Social Research Institute (ESRI) has warned that the risk of recession in Ireland’s main trading partners, challenges in the cost of living and rising interest rates will hamper economic growth next year.
The institute, in its latest quarterly economic commentary, forecasts that next year the economy will grow “at a significantly reduced pace” of 2.2% in terms of modified domestic demand and inflation will average 7.1%.
The pace of domestic economic growth has slowed throughout 2022 as the risk of a global recession has increased, ESRI said.
Export growth has provided an exceptionally strong boost to economic growth in recent years, but international challenges in key sectors such as ICT only add to the downside risks to the Irish economy.
According to ESRI, modified domestic demand has grown by 8.4% this year, driven by strong growth in investment and consumption, and the historically low employment (4.4%) recorded in the fourth quarter is expected to continue into next year .
After averaging 16.1% in 2021 and 4.9% in 2022, the panel forecasts that unemployment will average 4.3% next year.
The report forecasts a significant government budget surplus in 2022 and 2023 due to strong government revenues and especially corporate revenues.
It has forecast a GDP surplus of €3.5 billion, or 0.7%, this year and a GDP surplus of €6.5 billion, or 1.3%, next year after the state forecast a GDP deficit of -1.7% amounting to €7.1 billion.
Inflation, meanwhile, is expected to ease slightly from an average of 7.9% this year to 7.1% in 2023, still well above the 2021 average of 2.4% European Central Bank‘s target of 2%.
“Pressures on the cost of living for households and higher input costs for businesses are likely to dampen Ireland’s growth prospects in the coming year,” ESRI said Prof. Conor O’Toole.
“While the government has room for maneuver from a fiscal perspective, considerable diligence is required to ensure that any policy response is tailored and well-targeted.”
ESRI’s Professor Kieran McQuinn said foreign direct investment “must continue to be supported given its importance to the domestic economy.
In fact, in the multinational-dominated pharmaceutical sector, exports accounted for 55.8% of the value of all goods exported, with the value of pharmaceutical exports rising 49% year-on-year, while the value of all other goods rose 14%.
ESRI raised concerns about what it called “abnormal” productivity growth in the IT sector, possibly linked to the registration of patents and intellectual property at multinationals’ Irish subsidiaries.
It described productivity gains in IT as “an insurance policy for Ireland”, but one with inherent concentration risks given how the combined output of the sector and pharmaceuticals eclipses the rest of the economy.
In terms of housing, ESRI expects the number of new homes to fall from 28,000 this year to 26,000 next year.
It also described the central bank’s decision to relax rules on mortgage lending as “somewhat surprising” as it will “almost certainly” lead to rising demand for housing while property prices continue to rise rapidly.
She warned that mortgage-backed households “are likely to see a significant increase in their mortgage repayments” due to rising interest rates, with the ECB expected to hike rates by a further 0.5% later today.
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