1.2 Economic Outlook

The year 2022 will be remembered for the illegal invasion of Ukraine by Russia but also for the highest inflation in 38 years. The consumer price increase rose by 9.2% in the 12 months to October 2022, the highest level since June 1984 when it was 9.7%. Between April 2012 and June 2021 inflation had remained below the benchmark 2% rate, but it then began to rise quickly and between June and November 2022, when it was close to or above 9%, before it began to fall slowly. Inflation in housing, water, electricity, gas and other fuels reached around 27% between October 2022 and January 2023, while food and non-alcoholic beverage prices, which rose slower than general inflation initially, rose by over 13% between February and April 2023 before falling back slowly.

Rising oil and natural gas prices in mid to late 2021 fuelled the beginning of a rise in inflation. However, the events of February 2022 which witnessed the Russian illegal invasion of Ukraine pushed the price of natural gas to an all-time high and oil to the highest price for more than a decade in late Spring and early Summer of 2022. The high natural gas prices, on which fertiliser production requires, saw fertiliser prices rise by over 200%. Feed prices were also driven upwards as Russian and Ukrainian exports account for about 12% of total calories traded in the world. The two countries are among the top five global exporters for many important cereals and oilseeds, including wheat, barley, sunflowers and maize. Ukraine is also an important source of sunflower seed oil, supplying about 50% of the global market, while Russia is a major producer and exporter of potash, phosphate and nitrogen-containing fertilisers. The EU Member States agreed to impose a number of different sanctions on Russia, including a maximum price it would pay Russia for oil and they also agreed to significantly reduce their dependence on Russia for natural gas.

These events following on quickly after COVID-19 and the trade disruption caused by Brexit, and added to the pressures on the agri-food sector and tested its resilience. In March 2022, the FAO Food Price Index (FFPI) reached its highest level on record since 1990, at 159.7 points. During 2022 the average FFPI was 46% higher than it was in 2020 even though it was falling gradually from April 2022 onwards. In the year to March 2023, it had fallen each month by about 20% in total. While world inflation and food prices are easing, they are forecast to remain elevated over the short term compared to the previous decade.

Government’s Stability Programme Update In April 2023 the Department of Finance issued the Government’s Stability Programme Update in which they stated that the Irish economic data have surprised on the upside and the near-term outlook is somewhat better than anticipated at the time when Budget 2023 was announced in Autumn 2022. However, they warned that future prospects remain highly uncertain, against a fragile global economic backdrop and three factors have had a significant impact on economic activity, namely the Russian invasion of Ukraine, the rise in inflation triggered by a shock in energy prices and the rise in interest rates by many central banks around the world.

The resilience displayed by the Irish economy is most apparent in the labour market, where the rate of unemployment is close to historic lows and the number of people at work is at its highest ever level. The very high levels of inflation seen in 2022 have reduced somewhat in early 2023 with all indicators pointing to a further reduction during 2023 and into 2024.

The data in table 1.1 reflects the Department of Finance’s position in April 2023. While 2022 had seen strong growth in both GDP and GNI*, both are expected to see more modest growth in 2023 and 2024. Modified Domestic Demand, which is arguably the most accurate indicator of domestic economic activity in Ireland was 8.2% in 2022, but it is also expected to weaken this year with a slight recovery in 2024 and 2025. Unemployment took a big hit in 2021, mainly due to COVID-19, increasing from 5% in 2019 to 15.9% in 2021. Strong employment numbers in 2022 saw this drop to close to full employment at 4.5%, with this expected to drop marginally lower in 2023.

Table 1.1 Main economic and fiscal variables, per cent change (unless stated)

2022 2023 2024 2025 Forecast Forecast Forecast
Economic Activity
Real GDP	12.0	5.6	4.1	4.9
Real GNP	6.6	5.1	3.6	4.4
Modified domestic demand	8.2	2.1	2.5	3.2
Real GNI*	9.3	1.6	2.1	2.5
Prices
HICP	8.1	4.9	2.5	2.0
Core HICP	5.0	4.4	3.2	2.6
Balance of Payments
Trade balance (per cent of GDP)	37.3	39.6	40.1	40.9
Current account (per cent of GDP)	8.8	11.2	11.6	12.3
Labour Market
Total Employment (‘000)	2,547	2,588	2,624	2,662
Employment	6.6	1.6	1.4	1.5
Unemployment (per cent)	4.5	4.4	4.5	4.5

Source: Department of Finance Ireland’s Stability Programme, April 2023 Update

ESRI Summer Quarterly Economic Commentary The Economic and Social Research Institute (ERSI) released their Summer Quarterly Economic Commentary, in late June 2023. The commentary noted that economic headwinds such as rising interest rates, slower than expected global trade and persistent inflation are clouding the international outlook but the domestic economy is growing robustly. It did also warn that the emergence of capacity constraints, particularly in the labour and housing markets may have implications for future growth.

The ESRI expect GDP to grow by 0.1% this year, and 3.5% in 2024, but believe the economy as measured by modified domestic demand (MDD) will increase by 3.5% this year and 4.0% in 2024. The greater pace of economic activity in 2024 is mainly attributable to the expected lower rate of inflation.

Central Bank of Ireland Quarterly Bulletin In June 2023, the Central Bank of Ireland outlined that with global energy and food prices continuing to ease, domestic factors are beginning to play a more important role in the inflation outlook. Growth in the domestic economy in 2023 is expected to be slightly stronger than previously anticipated. Various indicators, particularly from the labour market, point to the economy operating at capacity. The tightening of monetary policy is beginning to feed through the economy and will contribute to dampening demand and economy-wide price pressures. In this environment, it will be important that fiscal policy charts a careful course that does not exacerbate the imbalance between demand and supply conditions across the economy.

EU’s Spring 2023 Economic Forecast The EU’s Spring 2023 Economic Forecast, released in May 2023, projected that the outlook for the EU economy continues to show resilience in a challenging global context. Lower energy prices, abating supply constraints and a strong labour market supported moderate growth in the first quarter of 2023, dispelling fears of a recession. This better-than-expected start to the year lifted the growth outlook for the EU economy to 1.0% in 2023 and 1.7% in 2024. The forecast states that the European economy has managed to contain the adverse impact of Russia’s war of aggression against Ukraine, weathering the energy crisis thanks to a rapid diversification of supply and a sizeable fall in gas consumption. Markedly lower energy prices are working their way through the economy, reducing firms’ production costs.

As inflation remains high, financing conditions are set to tighten further. Though the ECB and other EU central banks are expected to be nearing the end of the interest rate hiking cycle, the recent turbulence in the financial sector is likely to add pressure to the cost and ease of accessing credit. As for inflation, the headline index continued to decline in the first quarter of 2023, amid sharp deceleration of energy prices, but core inflation firmed, pointing to persistence of price pressures. For the second quarter, survey indicators suggest continued expansion, with services clearly outperforming the manufacturing sector and consumer confidence continuing its recovery from last autumn’s historical low.

The forecast indicated that GDP in Ireland is projected to remain on a solid growth path of 5.5% in 2023 and 5.0% in 2024. Net exports are the main driver of economic activity, which is also supported by resilient private consumption. Inflation is estimated to have peaked at 8.1% in 2022 and is set to moderate gradually throughout 2023 to reach 2.6% in 2024. The budget surplus is projected to increase further in 2023 and 2024.

Figure from page 14

Figure from page 15

OECD Economic Outlook, June 2023

The OECD Economic Outlook, published in June 2023 stated that the global economy is showing signs of improvement, but the upturn remains weak, amid significant downside risks. Lower energy prices are helping to bring down headline inflation and ease strains on household budgets, and the earlier than expected reopening of China has provided a boost to global activity. However, core inflation is proving persistent and the impact of higher interest rates is increasingly being felt across the economy.

The OECD projected that global GDP growth in 2023 to be 2.7%, the lowest annual rate since the global financial crisis, with the exception of the 2020 pandemic period. A modest improvement to 2.9% is foreseen for 2024. Annual OECD GDP growth is projected to be below trend in both 2023 and 2024, although it will gradually pick up through 2024 as inflation moderates and real incomes strengthen.

Headline inflation has fallen in most economies in recent months due to the downturn in energy prices, even though food and services prices have continued to rise rapidly. Core inflation remains stubbornly high. A combination of high inflation and modest wage increases led to falling real wages in 2022. Many governments rolled out extensive support to cushion the effects of high energy and food prices on households. Over the course of 2023, real wages are projected to stop declining in most OECD countries.

The OECD’s outlook for Ireland outlined that 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.