ESRI further downgrades economic growth forecast

December 15, 2023

The Economic and Social Research Institute has further downgraded its forecast for growth in the economy this year.

However, in its latest Quarterly Economic Commentary the think-tank says the underlying performance of the economy is stronger than the headline figures suggest.

It has also questioned the assumptions underpinning the national spending rule.

Meanwhile, later today the ECB meets to decide on interest rates.

The ESRI now expects the economy measured by GDP to shrink by 2.7% this year before bouncing back next year.

It has penciled in growth of 0.6% in the domestic economy, another downgrade from earlier forecasts.

The main reasons for the falloff in growth are the steep falls in the exports of certain goods, like pharmaceuticals, which are dominated by multinational companies in Ireland.

Also, the effect of higher prices and interest rates has hit consumer spending.

However, the ESRI cautions that in the same way that the performance of multinationals may have exaggerated the underlying the picture of the economy in the past, they may now be underestimating the level of activity.

It says employment remains high, tax returns are buoyant and falling inflation should give the economy a boost.

Later today, the ECB meets to decide on interest rates, which are expected to remain on hold.

The ESRI has also questioned if the 5% spending rule, brought into sharp and critical focus recently by the Fiscal Advisory Council, is really appropriate for an economy where long-term growth has averaged 4.5% over the past decade.

The ESRI’s Professor Kieran McQuinn said in his view, more time should be given to debating the parameters of rules governing spending and that in the past other rules like those on structural deficits weren’t a good fit for the economy.

The ESRI’s forecasts are for GDP to fall by 2.7% this year. This is deeper than its forecast in October of a fall of 1.6%. It forecasts Modified Domestic Demand (MDD) to grow by 0.6%, compared to 1.8% in October.

Next year, it expects GDP to grow by 2.3% and for MDD to grow by 2%.

Its forecasts for inflation this year are 6.4% for the Consumer Price Index (CPI) and 5.3% for the Harmonised Index of Consumer Prices (HICP).

This measure excludes mortgage interest repayments and is used to compare price movements across the EU.

Next year the ESRI forecasts CPI slowing to 2.9% with the HICP slowing to 2.4%.

Inflation is already slowing faster across the euro area than the ECB had forecast back in September.

Last month, inflation fell to 2.4% while core inflation, excluding energy and food, was 4.2%.

This has led many in the markets to speculate that the ECB may begin to bring down rates in the spring of next year.

The ECB will update their forecasts for inflation and growth in the euro area after their meeting today.

Speaking on Morning Ireland, Professor Kieran McQuinn said there was no doubt that the Irish economy is slowing.

He said that both multinational sector and indigenous businesses face “substantial headwinds, particularly on the multinational side”.

“What you’re seeing there is both the culmination of an international slowdown mainly due possibly to the higher interest rate environment that we’ve seen,” he said.

But he also said it is worth remembering that certain sectors of the Irish economy – the multinational sectors – grew very, very strongly during and after Covid, in particular pharma, ICT sectors.

“They’re inevitably slowing down as well,” he added.

In terms of employment rates, Professor McQuinn said that the two key indicators that are looked at to get a feel for the underlying economy essentially are the employment labour market and the tax take.

“In both categories we’re seeing strong returns,” he stated.

Article Source – ESRI further downgrades economic growth forecast – RTE

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