Irish economic outlook |Outlook 2023

Ireland certainly faces a difficult global economic environment in 2023. Consensus forecasts indicate recessions for key trading partners such as the Euro area and the United Kingdom, brought on by the squeeze on consumers from high Consumer Price Index (CPI) inflation and the uncertainty posed by the war in Ukraine.

However, as was the case during the COVID-19 pandemic, the Irish economy should prove relatively resilient in relation to its peers. Our current forecast is for 3.5% Gross Domestic Product (GDP) growth in 2023, albeit starkly split between a 6% gain in the multinational sector and a more subdued 2% growth amongst indigenous firms.

Export performance should provide some protection

The key factor underpinning Ireland’s performance has been the buoyant export sector, concentrated in the areas of information/communications ICT, pharmaceuticals and medical-technology and classic defensive sectors that have proven to be less sensitive to global downturns.

This pattern is once again evident. Despite the challenging international environment, Irish exports in the first three quarters of 2022 were up 15% on the year. It is striking that the Euro area industrial production grew by only 0.7% in 2022, but in Ireland, the industrial sector expanded by an enormous 17%.

The export sector’s health is not merely a statistical mirage, with little pass-through onto the domestic economy.

The Industrial Development Authority (IDA) reported that employment amongst multinational firms had grown to 301,000 in October 2022, up 9% on the year. Crucially, 60% of the 24,000 multinational jobs created in 2022 were outside of the ICT sector, allaying concerns that hiring freezes, or job cuts, amongst household names such as Google and Meta would threaten Ireland’s performance.

The public finances have also benefitted. The Irish Fiscal Advisory Council (IFAC) amongst others, has highlighted that just ten companies now account for over 50% of corporate tax revenues – a potential vulnerability. However, corporate tax revenues have continued to beat expectations, growing by an enormous 56% in the first eleven months of 2022 to €21bn.

A difficult year for the Irish consumer

Irish energy companies announced a plethora of price hikes during the summer of 2022, effectively doubling the average household electricity and gas bill over a 12-month period to above €4,000 and pushing the CPI inflation rate up to a peak of 9.2%.

At the time of writing, wholesale natural gas prices have fallen back to €76 per megawatt/hour, back to pre-Ukraine war levels, but it will take time for energy companies to pass through lower wholesale prices into household bills.

In the meantime, Irish households face a severe hit to their real incomes. Hence, we expect consumer spending will likely contract through the winter, before recovering later in the year and expanding by a muted 1.8% in 2023.

Thankfully, Budget 2023 put in place a range of income supports for Irish households. These included the €600 electricity price credit, double benefit payments, and tax cuts worth €830 at the average wage. We now expect that the Irish government ran a budget surplus of €4-5bn in 2022, so further support may be likely.

It is also worth pointing out that many Irish households have accumulated savings during the pandemic, which may be used to sustain spending in 2023. The Organisation for Economic Co-operation and Development (OECD) is currently projecting that the Irish household savings rate at 16.8% in 2022 was the highest amongst all the EU countries.

House price inflation starts to slow

Irish house price inflation was in double-digit territory for most of 2022, but it started to slow rapidly in the final months of the year as stretched valuations, economic uncertainty, and the prospect of further European Central Bank rate hikes weighed on sentiment.

Indeed, MyHome asking prices fell by -0.4% in Q4 2022, down for a second consecutive quarter, and up just 6% on the year. This clearly points to the current 9.8% official rate of house price inflation soon slowing into single-digit territory.

We expect modest house price declines may occur during the winter, typically the quietest period of the calendar year for the housing market, and as some of the froth built up during the pandemic unwinds. However, a sharp correction in Irish house prices looks unlikely. The housing market is still extremely tight, with a limited pool of homes available for sale, clearly insufficient to meet demand.

Furthermore, the Central Bank of Ireland’s surprise decision to loosen the mortgage lending rules will add momentum to pricing in 2023. The 3.5x loan-to-income threshold for lending to first-time-buyers has been raised to 4x. The Central Bank has itself estimated this loosening of the rules will eventually add 8% to Irish house prices over a three year period.

It could well be the case that our forecast for a 4% increase in Irish house prices could prove to be too conservative if first-time-buyers take on additional mortgage debt at an aggressive pace to compete for the limited pool of housing.

We are currently forecasting that housing completions will fall slightly to 27,000 in 2023, from 28,400 in 2022. Unfortunately, build cost inflation and other constraints such as the planning process have hurt viability and held back housing completions from rising above the 30,000 mark, which we had originally expected to be met this year.

It remains to be seen if recent government efforts to expediate planning processes can bear fruit.