Ireland’s economy has remained strong throughout the winter across all key macroeconomic indicators and a budgetary surplus has facilitated a wide range of social transfers to mitigate cost-of-living challenges. However, a discourse is emerging that economic bottlenecks may hamper growth and competitiveness. Dr. Daragh McGreal looks at what this will mean for the Irish economy in H1 2023.
Last year, despite challenges facing the global economy, Ireland’s economy was the fastest growing in Europe, with GDP growth of 12.2% and Modified Domestic Demand (MDD), which is used to measure the domestic economy, growing by 8.2%. The strong end to 2022 was driven by higher levels of investment by multinationals in intellectual property, continued growth in exports, higher private consumption (despite downbeat consumer sentiment), and a largely mild winter.
Inflation and global uncertainty
Despite these positives, there are several uncertainties such as a mixed global outlook, tighter ECB monetary policy, higher levels of inflation and service/infrastructure demand challenges. However, the government benefited from the exceptional level of tax receipts in 2022 which facilitated a budgetary surplus, allowing it to significantly invest in social transfers to cushion households against more severe impacts to their disposable incomes.
Inflation since the start of 2023 has been somewhat more persistent than had been anticipated, standing at 8.1% in February, up from 7.5% in January. While there’s been a fall in the cost of energy, inflation in other sectors remains high. However, as 2023 evolves, we expect inflation to fall, potentially to 5% on the back of falling energy prices.
Yet, while inflation may fall, the expected further monetary policy tightening from the ECB would cause issues for homeowners in Ireland, who will see mortgage and loan repayments increase which may drag on overall growth.
How will the tech sector slowdown impact Ireland?
In the tech sector, which Ireland relies on for exports, jobs, and tax revenue, negative impacts of the recent slowdown have been modest, with Ireland’s tech sector remaining relatively resilient. Total lay-offs to date here have accounted for around 1% of the sector’s workforce, compared to around 1.5%-2% globally.
There’s also a growing fear that the Irish Exchequer is over-reliant on tax from multinationals. To create a buffer against this risk, the government has transferred billions from its October budgetary surplus to a ‘rainy day’ fund. While the government hopes that any feared risks never materialise, its overall approach has been prudent to date.
Recent growth has been aided by higher levels of investment and consumption, strong exports and a mild winter. The government benefited from exceptional level of tax receipts which facilitated a budgetary surplus, enabling it to take one-off measures and to transfer reserves to the Rainy Day Fund.
Ireland’s outlook – cautiously optimistic, but prepared
Overall, Ireland’s outlook remains positive in 2023 and beyond, with inflation expected to reduce, although high prices and rising interest rates are still expected to drag on growth. However, unemployment is expected to remain low and labour shortages in certain sectors may hold back growth.
There’s a sense of relief among policymakers that many of the pre-winter economic downside risks, such as supply chain disruption, did not materialise. However, against the global backdrop of multiple negative risks, it would seem appropriate that the Irish approach is to prepare for a rainy day.
KPMG Global Economic Outlook
KPMG has released its Global Economic Outlook for H1 2023, bringing together experts from across the world to make sense of the economic trends, challenges and opportunities that are currently shaping governments, businesses and individuals across Ireland, Europe and globally. Read the report, and a deep dive on Ireland, below.
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Daragh McGreal
Director – Head of Strategic Economics
KPMG in Ireland
Christopher Brown
Partner, Head of Strategy
KPMG in Ireland
