IRELAND’S GROSS DOMESTIC Product is expected to contract this year – the first episode of negative GDP growth since 2012.

A new report by the Economic and Social Research Institute (ESRI), published today, states that the domestic economy is set to continue to grow this year and into next year, 

However, it states that GDP is expected to decline by 1.6% this year due to “the disproportionate impact of the multinational sector on headline economic data”.

Speaking to The Journal, Professor Kevin McQuinn, who co-authored the report, said GDP, export and investment figures can be “distorted from time-to-time due by multinational-related transactions”. 

“They don’t give you the underlying picture as to how the economy is performing. Typically what tends to happen over the last 10 years is that they tend to overstate how strongly the economy has been performing, most spectacularly in 2015 when the official figure said the Irish economy has grown by 25%,” he said.

“What you’re now seeing is the opposite, in the sense of modified domestic demand, which is our estimate of underlying growth in the economy. That is going to be positive for the year, but the headline GDP figure is going to be negative.”

Modified domestic demand (MDD), which captures consumption and modified investment, is set to increase by 1.8% this year.

McQuinn said that growth and consumption, strong tax returns and the 4% rate of unemployment seen over the last year all strongly point towards the underlying economy growing this year. 

“But there are certainly issues around some of the export figures and the investment figures which are tied in with some of the multinational-related considerations, and that’s causing GDP overall to actually contract or decline for the year.”

Asked what is causing a slowdown in multinational activity, McQuinn pointed to the pharmaceutical sector, which he said has been “a real dynamic dynamism for the Irish economy over the last three or four years”. 

“In the last period of time, there’s some evidence that export growth tied in with pharmaceuticals are slowing down quite a bit and that’s almost inevitable. You couldn’t have the kind of pace of growth continuing that we that we had seen particularly after the pandemic.”

He also said the “rapid” global interest rate increases in the EU, US and the Bank of England have “inevitably” had a negative impact on demand for exported goods and services associated with the Irish economy.

Inflation

Meanwhile, inflation is still having a negative impact on the Irish outlook. According to the report, while the pace of price increases has been declining on a persistent basis to its present rate, the ESRI still expect the Consumer Price Index (CPI) to increase by 6% this year and 3.2% next year.

McQuinn said the institute believed the rate of inflation would have fallen by more. He pointed to areas like food and a resurgence in oil prices as the cause of this, along with increasing housing costs. 

“There’s a number of areas where you are continuing to see a persistence in inflation. But overall, we think the inflation rate will continue to fall over the next year, but it’s just not falling quite as quickly as what we thought it would previously.”

The report states that the domestic Irish economy is presently operating at capacity, “in particular in relation to employment intensive sectors like construction”.

It states that in this environment, additional domestic pressures are likely to feed through to prices in the short term.

“However, targeting expenditure towards addressing infrastructure bottlenecks and improving the productive capacity of the economy can alleviate capacity constraints in the medium term.”

Dr Conor O’Toole, who co-authored the report, said: “As energy prices have eased, inflation has dropped relative to last year. However, these declines have stalled in recent months as the domestic economy continues to grow. This is going to present challenges to policymakers attempting to contain cost of living pressures.”

McQuinn said that while the Budget is usually framed in exceptional circumstances, “it is quite exceptional at the present”. 

“The economy is growing very strongly still. The unemployment rate is very low. That does give rise to what we call capacity constraints in the sense that we have to be careful that we don’t overheat the economy, otherwise, you’re going to see a real doubling down if you like on the inflationary pressures as a result,” he said.

“But equally the government has committed to spend in certain areas. There are certain infrastructural bottlenecks that need to be addressed, particularly in areas such as housing, and other infrastructural issues.”

He said the Government has to spend in those areas in order to get some of the costs associated with those areas down. “If you think about it, more government spending should result in average housing costs coming down because it will increase supply over the medium-term.”

“On the one hand, the Government has to do that, but on the other hand, it has to make sure it doesn’t overheat the economy and fuel the inflationary pressures, and that’s really where some tricky decisions have to be made in relation to budgetary policy.”