Employers’ group Ibec has downgraded its growth forecasts for the Irish economy, citing “the dampening effects” of rising prices and higher energy costs on consumer spending.
In its latest quarterly outlook, the organisation also warned that the global economy was facing a painful reset on the back of higher interest rates, one that is likely to trigger “further instability” on financial markets.
Ibec forecast domestic demand in the economy here would grow by 3 per cent next year, down from a previous forecast of 4 per cent. In terms of gross domestic product (GDP), the more standard measure of growth, the Irish economy is expected to grow by just 2 per cent in 2023, down from an expected 5.6 per cent this year and more than 13 per cent last year.
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The lower forecasts reflect the expected impact of rising costs on consumers and businesses here.
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“Over the coming months, the bite of energy, interest rate and other costs will begin to be felt by households, despite the supportive stance of Government in the recent budget,” Ibec said.
It noted that Irish households use about 45 per cent of their annual heating in the first quarter of any given year as temperatures drop. “As a result, seasonality in spending decisions may be pronounced next year,” it said.
The higher-cost environment is already hitting consumption here with retail sales, excluding cars and bars, down more than 3 per cent in August.
The difficult economic climate is also expected “to see a slowdown in new hiring as businesses face both higher costs and a tight labour market in which it is difficult to recruit”, it said.
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On the upside, the lobby group said the strength of the public finances meant Ireland was in a unique position in Europe with tax revenues growing rapidly, allowing the Government to engage in both higher spending and to run a significant budget surplus. Ibec’s report came as the latest exchequer figures from the Department of Finance show the Government collected almost €64 billion in taxes so far this year, 25 per cent up on last year.
In its report, Ibec said that, as a small open economy, Ireland was exposed to the prospect of a global economic slowdown and recessions in some major trading partners. “The prospect of an economic reset through accelerated monetary tightening by the world’s major central banks, is one which will lead to some further instability in financial markets globally,” it said.
The markets are expecting the European Central Bank to raise the interest rate to at least 3 per cent from the current rate of 2 per cent by the middle of 2023.
Ibec said this monetary normalisation will drive reallocation of capital away from the phenomenon of “reach for yield” – whereby investors bought riskier assets to achieve higher yields. It noted that there had already been volatility around risky assets such as cryptocurrencies and a move toward equities with earnings.
Ibec’s head of policy and chief economist Gerard Brady said: “Whilst Ireland’s economic momentum in the first half of 2022 was extraordinarily strong, there are now several leading indicators that suggest the volume of activity in the consumer economy and labour market may be beginning to slow.”
