Irish economy on ‘slower growth path’ amid high interest rates, Central Bank warns

Regulator says ongoing transmission of tighter monetary policy to the economy will weigh on growth

The Irish economy has shifted onto “a slower growth path” reflecting the impact of higher interest rates and a slowdown in global economic activity, the Central Bank has warned.

In its latest quarterly bulletin, the regulator said the economy as measured by gross domestic product (GDP) was likely to contract this year for the first time since 2012. GDP, the standard yardstick for economic growth, is expected to shrink by 1.3 per cent in 2023 after growing by 9.4 per cent last year.

This reflected falling net exports due to geopolitics, the higher interest-rate environment and waning pandemic-related demand, the bank said.

Lower levels of activity in the pharmaceutical and ICT (information and communications technology) manufacturing sectors and a sharp decline in offshore exports (known as contract manufacturing) was cited as one of the chief drags on headline growth. Contract manufacturing accounts for about 20 per cent of Irish exports.


The domestic Irish economy as measured by modified domestic demand (MDD), a metric that weeds out some of the distorting financial flows related to multinationals, is still expected to grow, however, by 1.5 per cent this year and by 2.5 per cent in 2024.

“The ongoing transmission of tighter monetary policy to the economy will weigh on growth, which is already being limited by capacity constraints,” the Central Bank said in its latest assessment. “As a result, the economy has shifted onto a slower growth path following the strong post-pandemic recovery,” it said.

Robert Kelly, the Central Bank’s director of economics and statistics, said the lower levels of growth forecast were more in line with the Irish economy’s “medium-term potential”.

In its report, the bank said headline inflation had fallen more rapidly than expected and was likely to return to 2.1 per cent, close to the European Central Bank’s target rate, by 2025.

While recent reductions in inflation mostly reflect external factors including falling energy and food commodity prices, domestic price pressures are expected to be more persistent, it said.

It cautioned the fallout from higher interest rates was still to be fully absorbed. “Monetary policy works through multiple channels, and the overall impact is only seen with a considerable lag,” it said.

It noted, however, that the pass-through of higher interest rates to retail rates on loans and deposits held by Irish consumers and businesses had “become more pronounced” in recent months.

Despite the slowdown, the labour market in Ireland “has been remarkably resilient”, the Central Bank said. Unemployment is set to rise slightly to 4.8 per cent in 2024 but remain below 5 per cent out to 2026.

The regulator was somewhat critical of the Government’s budgetary stance, noting that fiscal policy was set to continue to be expansionary in 2024, “as it was this year, at a time when the economy is operating at its medium-term potential”.

“A clear focus in public policy towards enhancing the supply side of the economy in order to promote sustainable growth in living standards is warranted,” it said.

The Irish Fiscal Advisory Council recently locked horns with Minister for Finance Michael McGrath by claiming Budget 2024 was too inflationary and that much of the cost-of-living supports were untargeted.

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Eoin Burke-Kennedy

Eoin Burke-Kennedy

Eoin Burke-Kennedy is Economics Correspondent of The Irish Times