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Despite significant headwinds, Irish economy set to perform in robust manner for remainder of 2022

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Despite significant headwinds, Irish economy set to perform in robust manner for remainder of 2022

Despite significant headwinds, Irish economy set to perform in robust manner for remainder of 2022
October 06
09:12 2022
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Despite significant headwinds, the Irish economy is set to perform in a robust manner for remainder of 2022, however the pace of growth is set to moderate in 2023 as both macroeconomic uncertainty and inflationary pressures persist, according to the ESRI (Economic & Social Research Institute) Quarterly Economic Commentary, Autumn 2022.

Despite extraordinary uncertainty in the international economy, the Irish economy continues to demonstrate a significant degree of resilience. This is particularly evident in the ICT and pharmaceutical sectors which have continued to drive Irish export growth. However, household spending and investment are also continuing to expand, and the ESRI now believes that Modified Domestic Demand (MDD), the more accurate measure of domestic economic activity, will grow by 7.5 per cent this year.

The ESRI now anticipates a surplus in the Government Balance for this year and next as a result of the substantial recovery in the labour market and robust growth in taxation receipts. In a box to the Commentary addressing the sustainability of corporation taxes, the ESRI finds that while question marks persist as to the ongoing sustainability of these returns, Irish corporation tax receipts are likely to continue to remain elevated even with the proposed OECD Base Erosion and Profit Shifting (BEPS) reform.

The healthy state of the public finances has enabled the Government to substantially increase spending to insulate households as best as possible from heightened cost of living pressures. Increased use of one-off measures to target energy costs and the commitment to the “rainy day fund” are welcome given the uncertainty. The scale of the package may, however, additionally fuel inflationary pressures in the domestic economy. As the war in Ukraine and strain on the European energy market continues, inflation is expected to increase through the winter before moderating in 2023. The ESRI now forecasts inflation to average 8.1 per cent in 2022 and 6.8 per cent in 2023.

Recession risks are now rising across Ireland’s main trading partners, with prospects for the UK economy of particular concern. While the Irish financial sector is in a much more stable position than it was in 2007 and is less integrated with the UK sector than before, it is very difficult to fully assess the contagion effects of a possible full-blown financial crisis in the UK. The deteriorating outlook amongst most large economies will likely lead to a moderation in growth in the investment and the traded sector. Overall, the ESRI expects modified domestic demand to increase by just 2.5 per cent in 2023, which is a notable downward revision on our previous estimates.

Commenting on the report, author Kieran McQuinn of the ESRI stated: “While the Irish economy has performed robustly in recent years, the overall growth rate in the economy is set to moderate somewhat in 2023 with Modified Domestic Demand (MDD) now forecast to increase by 2.5 per cent.”

Commenting on the report, author Conor O’Toole of the ESRI stated: “As inflationary pressures continue to erode real incomes in Ireland, continued use of targeted policies to address the cost of living crisis is warranted. The commitment to a rainy day fund of a portion of the excess corporation tax receipts is very welcome, especially given the extremely uncertain global context.”

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