After two years of double-digit growth, GDP is set to decelerate, with growth projected at 4.4% in 2023 and 3.7% in 2024, as support from exports in multinational-dominated sectors gradually eases. Despite persistent inflation, consumer spending will be relatively strong in 2023, underpinned by significant employment growth and the summer tourist season. Confidence improvements will gradually strengthen business orders and enhance firms’ incentives to invest. Modified domestic demand, which removes some distortions due to the high share of multinational firms, will grow by 1.8% in 2023, and 3.0% in 2024.
On the back of continued strength in tax receipts, the government has announced cost-of-living measures worth a total of 2.4% of GDP (4.4% of GNI*, i.e., gross national income excluding globalisation effects) since early-2022, with support becoming increasingly targeted. To improve the long-term sustainability of public finances and increase resilience to shocks, the allocation of windfall tax revenues to the National Reserve Fund should be continued, and adherence to the 5% spending rule should be rapidly restored. Productivity-enhancing structural reforms will be needed to cope with rapid population ageing and other long-term fiscal challenges.
Weak investment is weighing on the domestic economy
Supported by post-pandemic pent-up consumer demand and the strength of multinational-dominated sectors, GDP grew by over 12% in 2022. Household consumption remained resilient in the first quarter of 2023, supported by significant wage and employment growth and still large pandemic-related excess savings. However, a weaker global outlook, rising energy and input prices, and higher borrowing costs lowered firms’ investment incentives, especially in the manufacturing sector. Combined with low exports, this led to a contraction in GDP in the first quarter of 2023.
1. Excludes large transactions of foreign corporations that do not have a big impact on the domestic economy.
2. Calculations based on a common set of 213 unweighted sub-indices.
Source: OECD Economic Outlook 113 database; and Eurostat.
StatLink2 https://stat.link/hx8pe9
Ireland: Demand, output and prices
Percentage changes, volume (2020 prices)
Modified final domestic demand², volume
GDP deflator
Harmonised index of consumer prices
Harmonised index of core inflation³
Unemployment rate (% of labour force)
Household saving ratio, net (% of disposable income)
General government financial balance⁴ (% of GDP)
General government gross debt (% of GDP)
General government debt, Maastricht definition⁵ (% of GDP)
Current account balance (% of GDP)
1. Contributions to changes in real GDP, actual amount in the first column.
2. Excludes airplanes purchased by leasing companies in Ireland but then operated in other countries and investment in imported intellectual property by multinationals.
3. Harmonised index of consumer prices excluding food, energy, alcohol and tobacco.
4. Includes the one-off impact of recapitalisations in the banking sector.
5. The Maastricht definition of general government debt includes only loans, debt securities, and currency and deposits, with debt at face value rather than market value.
Source: OECD Economic Outlook 113 database.
StatLink
2 https://stat.link/vul4yx
With core inflation at 4.3% in April, underlying inflationary pressures persist. Year-on-year headline consumer price inflation eased to 6.3%, despite some acceleration in energy prices and continued strength in food price inflation, partly driven by contract renegotiations with long-term suppliers. In February, the government launched its third cost-of-living package (0.3% of 2022 GDP; 0.5% of GNI*), which included one-off welfare payments to pensioners and lower-income households, the extension of transitory reductions in energy-related VAT and excise duties to end-October, and a revamp of the temporary energy support scheme for SMEs, extended to end-May.
Buoyant, but partly transient, corporate tax revenues warrant caution
Since early 2022, the government has provided cost-of-living support worth 2.4% of GDP (4.4% of GNI*). Mostly temporary, these measures, about one third of which were targeted, mitigated the burden of surging energy bills on households and small businesses. Continued buoyancy in corporate tax receipts, which accounted for one fifth of total revenues, helped attain a fiscal surplus of 1.6% of GDP in 2022 (3.0% of GNI*). However, given the uncertain impact on multinationals’ location strategies of the increased 15% effective corporate tax rate, set to kick in in 2024, part of any further windfall tax gains should continue to be allocated to the National Reserve Fund, on top of the EUR 6 billion already put in it since 2022, or to a new long-term savings fund, whose establishment is being discussed. Following the National Development Plan, public investment spending, particularly in housing, is set to remain strong. The budget surplus, though, is expected to increase to 2.4% of GDP in 2024, as public support is scaled back amidst eased economic uncertainty
Tighter financial conditions pose some risks
Household consumption is set to remain resilient, supported by persistent wage growth, amidst skills shortages, and the summer tourist season. Rising demand, particularly for services, will boost business investment. Headline inflation is projected to ease, although the decline will be slowed by the phasing out of temporary reductions in energy-related indirect taxes in the latter half of 2023. Core inflation remains sticky, which may lead to higher-than-expected precautionary savings by households in 2024.Tightening financial conditions and rising input prices could derail investment to boost housing supply and residential retrofitting, including key public programmes. Further rises in interest rates may trigger sharp price corrections in the portfolios of commercial property funds, posing risks to financial stability. On the positive side, effective implementation of the Windsor Framework may support growth further by easing uncertainty about trade with the United Kingdom.
Fiscal caution and structural reforms are key to long-term welfare gains
Long-term fiscal sustainability and effective structural reforms are key for the government’s investmentintensive reform agenda, ranging from climate and digital transitions to ensuring affordable quality housing and health services for a rapidly ageing population. Adherence to the 5% spending rule and allocating part of any further windfall tax gains to the National Reserve Fund, or a new long-term savings fund – were it to be established, are thus essential. Productivity-enhancing policies should also prioritise the reduction of gender imbalances, for instance by strengthening incentives for female labour market participation, to build on its positive post-COVID trend. Continuing to provide adequate public financial support for childcare and measures to expand childcare capacity, together with flexible work arrangements, are key. Any additional public support to income, if warranted by renewed energy price shocks, should preserve price signals, be temporary and targeted to low-income households via existing welfare schemes.