ESRI forecasts return to growth in household incomes this year as inflation falls
The ESRI has upgraded its outlook for economic growth this year, amid falling inflation, an expected normalisation of exports and moderate expansion of the domestic economy.
In its Quarterly Economic Commentary, the institute forecasts that the domestic economy as measured by Modified Domestic Demand will grow by 2.3% in 2024, up from its prediction of 2% in December, and will expand by 2.5% next year.
The think-tank also estimates that the economy, as measured by Gross Domestic Product, will expand by 2.5% this year, up from 2.3% in its last prediction, fuelled by faster than expected disinflation, the likelihood of interest rates falling later this year and a strong labour market.
However, GDP growth is forecast to ease slightly back to 2.3% in 2025.
“Unlike 2023, we expect all major indicators of economic activity to register positive growth in 2024 and 2025 indicating likely stable growth over the period,” said Professor Kieran McQuinn of the ESRI, who is a co-author of the report.
The institute thinks that exports will grow by 3.3% this year, marginally stronger than it previously thought, while private consumer spending will continue to be robust, expanding by 2.5%.
Public spending will also be stronger than the ESRI estimated in December, growing by 1.2% this year.
The analysis also details how the labour market is likely to continue performing at levels that are close to its capacity, with unemployment set to average out at 4.3% for this year and 4.2% next year.
Consumer prices will continue falling as energy costs soften, the research also suggests, with inflation set to average out at 2.3% across the year, lower than the 2.9% that the ESRI had forecast in December.
The ESRI says the reducing inflation outlook will lead to a return to growth in real incomes, which could grow by around 2.2%.
“Consumer prices have increased very rapidly over the past number of years, creating notable challenges for many households,” said the ESRI’s Dr Conor O’Toole, co-author of the report.
“However, we expect prices to rise at a much more modest pace for 2024 and 2025.”
In relation to the public finances, the ESRI expects the position to continue to be strong, with growth in income tax and VAT and levels of corporation tax remaining high.
However, ahead of the start of the budgetary cycle it has warned that the Government will face a balancing act in terms of investing what is needed in infrastructure without overheating the economy.
“The challenge is how do you bring about that investment in an economy that is growing as strongly and as robustly as the Irish economy is,” said Kieran McQuinn.
“And I think in that context you have be very careful what you do as far as taxation and cuts in personal taxation and cuts in taxation rates generally.”
He said the ESRI has always argued there can be adjustments in the taxation system, but overall that taxation package should be “pretty much neutral”.
“And one could argue maybe even contractual, you may even need to take some money out of the economy going forward given how robustly it is performing, given that you are going to be putting money in other areas of the economy, particularly through hiking investment levels,” he added.
But the ESRI also warns that there are a number of challenges which could impact the local and global economy.
These include ongoing geopolitical tensions in the Middle East and Ukraine which could affect trade.
It also highlights bottlenecks in infrastructure, given that the economy is close to capacity.
Fluctuations in activity in the multinational sector are also a risk to growth, it claims.
“Internationally, growth rates are stabilising and disinflation is occurring somewhat more quickly than expected,” the report states.
“If these conditions continue, it is likely to allow monetary authorities space to moderate official policy rates.”
“However, geopolitical tensions and their impact on global trade flows add notable downside risk.”
In relation to housing the ESRI expects around 33,000 new homes to be completed this year, which Mr McQuinn described as “a little bit disappointing” given that was the figure of completions last year.
“It is still clear that we need to build more housing units than we are at present,” he said.
He added though that a moderate increase is expected next year.
The report also highlights that there is an under-occupancy rate of 67% in housing in Ireland, putting Ireland in the top three in Europe.
In cities, the under occupation rate is 58.7% which is one of the highest in Europe, it says.
It also outlines how 73% of dwellings in Ireland have more than two bedrooms and Ireland has a comparatively high share of houses and small share of apartments, making it difficult for those who want to adapt their housing to their stage of life.
