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28 Jun 2022

Irish economy to grow despite average inflation of 7.1% in 2022

Irish economy to grow despite average inflation of 7.1% in 2022

The Irish economy is to continue to grow in 2022 despite forecasts that inflation will average at 7.1% in 2022, according to a report by the Economic and Social Research Institute (ESRI).

The ESRI report, published on Thursday, believes that Ireland’s Gross Domestic Product (GDP) will grow by 6.8% this year – largely driven by a strong export sector.

GDP is one way to measure a country’s economic health, but has been criticised as being too blunt a measurement – and is skewed in Ireland in particular by multinationals and the large presence of aircraft leasing companies based in Ireland.

Another way of measuring the economy is modified domestic demand (MDD). This is the sum of personal and government consumption and investment, and excludes things like changes in the value of stocks.

MMD is set to increase by a slower pace than previously expected, the ESRI has said, with growth of 4.4% expected this year and 3.7% in 2023, compared to 5% and 4.5% previously.

The ESRI also pointed to the European Central Bank (ECB) signalling that monetary policy rates are set to increase over the coming quarters.

“This will likely dampen investment sentiment and consumer spending,” the report notes.

“We find that the proposed increase in interest rates will see Irish house prices fall by 2% relative to what they would otherwise be, although demand-side characteristics, as well as a sluggish supply response, will continue to exert upward pressure on house prices.”

As Covid-19 supports have ended, the unemployment rate has eased considerably; the ESRI is expecting unemployment to fall further as a result, reaching 4.3% by the end of the year and averaging at 5% for the year.

An unemployment rate of 4% is expected in 2023.

The ESRI report also noted that a strong labour market, “robust” growth in taxation receipts and a “significant” contingency fund set aside in the last Budget, “allows the Government some scope in alleviating higher living costs for low-income households”.

Commenting on the report, author Kieran McQuinn said: “We still expect the domestic economy to grow strongly in 2022 and 2023.

“However, there are significant downside risks to the growth outlook with greater inflationary pressures being the most pressing.”

Commenting on the report, author Conor O’Toole of the ESRI stated: “The economy has recovered from the pandemic in a robust fashion, with the labour market recovering particularly strongly.

“The challenge for policymakers now will be to respond to higher inflation against a backdrop of tight labour markets and rising interest rates.”

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