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ESRI expects economy to grow at ‘significantly reduced pace’ in 2023
The Economic and Social Research Institute expects the economy to grow “at a significantly reduced pace” next year given the likelihood of recession in overseas markets and continuing cost of living pressures at home.
In its latest Quarterly Economic Commentary, the institute also predicts that households with mortgages are likely to see their repayment burdens go up as result of the relaxation of lending rules and higher interest rates.
It also expresses concern the technology sector here may “be vulnerable to a correction”.
The institute still expects unemployment to decline further and for consumption to continue to increase off the back of higher wages.
It says much will depend on how any international slowdown affects the pharmaceutical and computer services industries located here, which are dominated by multinationals.
The report describes what it says are “abnormal growth rates in productivity in the ICT sector over recent years”, which are “an additional sign that this sector may in fact be vulnerable to a correction”.
On housing, it expects 28,000 new units to be built this year, the biggest increase since the property crash. However, it expects this to fall back to 26,000 next year.
It describes the recent decision by the Central Bank to relax mortgage lending rules as “somewhat surprising” and says households with mortgages are likely to see their repayment burden go up as a result of this and higher interest rates.
Later today, the ECB meets in Frankfurt where it is widely expected interest rates will be increased again, by 0.5%.
The ESRI forecasts the economy, measured by GDP, will grow by 10.8% this year and 3% next year.
It expects the domestic economy, measured by Modified Domestic Demand, to grow by 8.4% this year before slowing to 2.2% next year.
It predicts that inflation will average this year at 7.9% and remain elevated at 7.1% next year.
However, it expects the labour market to remain strong, with unemployment set to decline further from 4.9% this year to 4.3% next year.
The public finances are also expected to remain strong, with a surplus of €3.5 billion or 0.7% GDP expected this year increasing to €6.5 billion or 1.3% GDP next year.
The ESRI does raise concerns about what it describes as “the abnormal” increase in the productivity of the ICT sector in recent years, which it suggests may be related in part to patents and intellectual property being registered to Irish subsidiaries of multinationals.
It points out that exports of pharmaceuticals accounted for 55.8% of the value of all exported goods. In the third quarter of this year compared to a year ago, the value of exports from this sector has increased by 49% while the value of all other goods exports over the same period went up by 14%.
It describes this and the productivity gains for ICT services as “an insulation policy for Ireland” but one that contains “concentration risks” with so much of our economic output coming from just two sectors.
On housing, the report says the change to mortgage lending rules “will almost certainly” lead to an increase in the demand for housing. It describes “as somewhat surprising” the decision by the Central Bank to loosen the credit rules at a time when house prices are going up by double digits.
It says both factors will impact housing affordability and that overall, mortgaged households are “likely to see a significant increase in their mortgage repayment levels” due to the changes.
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