Growth sting: Inflation is heading for double digits this year and there’s a 2008 level of pessimism forecast for next year
Inflation is here to stay and a mini (domestic) recession is on the way, in an economic sting in the tail of the larger-than-expected €11bn Budget package.
he Department of Finance now expects price rises to average 7pc in 2023, after increasing by 8.5pc on average this year. Inflation is set to peak in double digits at around 10.5pc before Christmas.
Modified domestic demand – a measure of growth that strips out volatile aircraft leasing and software patent transactions – is expected to drop to 1.2pc next year, from an estimated 7.7pc this year.
While the figures surprise on the upside for this year, next year’s downgrade is the most pessimistic growth forecast for the Irish economy since the 2008 financial crisis. It amounts to a fall of almost three points on previous predictions for the year.
In modified domestic demand terms, the Irish economy could see one or two quarters of negative growth in 2023, although in GDP terms – which measures the entire economy, including multinationals – things look a lot rosier.
GDP is set to come in at 10pc this year – double most official international forecasts – before falling to 4.7pc in 2023. It is expected to fall back to 3.3pc in 2024 before rising slightly to 3.8pc in 2025.
Domestic demand is set to catch up to the multinational sector from 2024, rising slightly to 3.6pc in 2025.
“These are not just abstract economic figures,” Finance Minister Paschal Donohoe told the Dáil.
“The Government understands, and I understand, the worries which small-business owners, farmers, pensioners, those who work really hard to get by, will feel. This is why the Government will help, and by helping our country will overcome this challenge.”
Ireland’s near-term economic fate hinges on how Russia behaves and on how the US, UK and eurozone economies fare in response to what could be a serious energy crisis this winter.
According to a Department of Finance shock scenario – where there is a complete cut-off of Russian gas supplies and oil flows to the eurozone – average inflation would be 9pc for this year and 9.5pc next year, peaking at just under 13pc early next year.
Modified domestic demand would come in at close to zero next year, in that case, while overall GDP would drop to around 3.5pc. The department is not predicting energy blackouts here, assuming Ireland will be affected on prices only.
Things could turn out better than forecast – a milder winter will lower demand for gas and oil – although the department notes that “downside risks dominate, with the potential to make a difficult situation even worse”.
Markets are pricing in a eurozone recession from the end of this year and according to the latest forecast from the Organisation for Economic Co-operation and Development (OECD), UK growth is set to flatline.
Christine Lagarde, president of the European Central Bank (ECB), said this week that the economic outlook “is darkening” and she expects business activity to “slow substantially” – although she hedged her language on a future recession.
Whatever happens in the near term, the Department of Finance’s fiscal and economic analysis points to the end of an era where economic growth and tax receipts always surprise on the upside. The Government has acknowledged that, by pledging to put €6bn over the next two years into a “national reserve fund” to guard against even rainier days.
David McNamara, director of EY Ireland’s economic advisory services, said “prudence must be the watchword in the coming years” as central banks raise interest rates and government borrowing becomes more expensive.
But the end of the high-growth era puts more pressure on the Government to make Ireland a place where companies want to invest – and people can afford to live.
Mr Donohoe insisted Ireland’s corporation tax regime “is a core element of our economic policy mix and a longstanding anchor of our offering to attract FDI” but said the Government would “play to” strengths such as the business environment and education.
On the investment front, multinationals are still upbeat, despite an end to Ireland’s 12.5pc corporate tax rate (pending EU and US confirmation).
The American Chamber of Commerce said 95pc of firms it surveyed have a positive view of Ireland as a place to invest.
However, it is moves on housing, healthcare, childcare and energy infrastructure that will make more of a difference to attracting foreign workers and preventing young Irish people from leaving.