Attempting to predict the growth rate of the Irish economy based on Gross Domestic Product (GDP), an internationally recognized measure, is often seen as a pointless endeavor. Currently, GDP can often give a misleading picture, as this figure is deeply influenced by the tax-funded activities of multinational corporations.
For this reason, the European Commission’s latest forecast that GDP fell by around 1.9% last year and will increase by just 1.2% in 2024 did not attract much attention. As the committee itself points out, last year’s GDP recession is generally dismissed as “technical” because the domestic economy held up well last year.
Nevertheless, there is an underlying trend here that is worth noting. The EU economy, where Ireland’s main market is located, is slowing. And this is also affecting Ireland. Corporate investment, which is sensitive to demand, is lackluster at best. Although consumer spending is supported by a strong job market, rising interest rates and the cost-of-living crisis are hitting hard here as well.
None of this is all that surprising, nor should it be a reason for undue concern. Unemployment remains low and Ireland’s public finances are healthy. A recovery in the EU economy, coupled with lower interest rates, should support Ireland’s outlook over the next two to three years. Inflation is falling and, encouragingly, the committee believes Ireland’s inflation rate will average 2.2% in 2024 and fall below 2% next year. This will come as a great relief to consumers, even if actual price levels remain high.
However, the government needs to bear in mind that the underlying level of economic growth here is likely to be slowing and cannot guarantee that it will outperform the EU average in the long term. Ireland has fared particularly well in recent years, helped by a flood of inward investment since 2015, boosting employment, growth and certain tax revenues. The domestic economy also performed well, supported by solid consumer spending and with government support throughout the pandemic.
But now the situation is even more complicated. Consumers are still dealing with the fallout from the cost-of-living crisis, while businesses complain of a rising cost base. Ireland faces increased competition for foreign direct investment and new opportunities in this area.
In terms of policy, the time has come to go back to basics. As well as tackling the housing crisis, there are policy challenges that need to be addressed in education and infrastructure. Competitiveness in a broader sense must be supported. Many are long-term, politically unglamorous or sometimes unpopular jobs. But it has to be done.