Heavy reliance on multinationals has left Ireland’s economy vulnerable to shocks, but a national recession is unlikely, according to a new analysis.
Inflation is expected to remain high over the next year, contributing to an international recession that will affect Ireland’s open economy and lead to a sharp slowdown in growth. Economic and Social Research Institute (ESRI) research professor Conor O’Toole said:
ESRI’s latest quarterly report for the year estimates that inflation will reach around 7.1% next year and while Ireland may emerge from recession there will still be a sharp slowdown in economic growth that will hit lower income households .
“If price pressures continue, more one-off cost measures may be needed into 2023,” said Kieran McQuinn, professor of economics at ESRI.
Consumer consumption reached nearly 6% this year but is expected to fall to just over 2% next year as shoppers tighten their belts.
“Households will have less disposable income and higher income households can take precautionary savings,” Mr O’Toole said.
The ESRI report also predicted a decline in housing provision in 2023 due to high input costs and labor shortages.
It is expected to reach around 26,000 completions, which is around 10,000 fewer than what experts say is needed per year to deal with the housing crisis.
The housing crisis continues to affect low earners but does not appear to be significantly affecting workers in multinationals, Mr O’Toole said.
ESRI expects unemployment to remain at low levels next year. However, the report found that employment levels have not recovered across all sectors, as the workforce in the food and beverage industry is still below pre-pandemic numbers.
Ireland’s economy has been shielded from the difficult economic environment by an increase in household savings and high levels of growth in the information and communications technology and pharmaceutical sectors, the report stressed.
These two sectors account for around half of all exports from Ireland.
However, they are increasingly facing inflationary pressures and rising input costs and interest rate hikes, forcing some ICT companies such as social media giant Meta to downsize. Mr McQuinn said:
ESRI forecast a “significant reduction” in investment in the Irish economy over the next year as the global economy battles headwinds. This was confirmed by IDA Ireland in its annual report, which forecast sluggish growth in the second half of 2023.
The government has often relied on corporate tax revenues to fund budgets, but Ireland could lose a large chunk of GDP if the volatile international trade environment doesn’t ease over the next year.
Going forward, the think tank is calling for more clarity and transparency on the amount of corporate tax revenue going into the government’s rainy day fund.