Central Bank of Ireland highlights shifts in the Irish economy in 2023

The Central Bank of Ireland’s final quarterly bulletin for 2023 revealed insights into Ireland’s economic landscape encompassing falling inflation and modified growth forecasts.

According to Robert Kelly, director of economics and statistics at the Central Bank of Ireland, the Irish economy has shifted to a phase of growth aligning with its medium-term potential. Inflation has notably declined in 2023, with the impact of the initial commodity price shock diminishing, highlighted the report.

As domestic economic momentum wanes and the effects of tighter monetary policy unfold, the disinflation process is anticipated to proceed more gradually over the next two years.

According to Kelly, while GDP is expected to contract for the entire year, the domestic economy, measured by modified domestic demand (MDD), is projected to grow. However, this growth will experience a notable slowdown throughout the year, resulting in a more restrained forecast for MDD growth: 2.5% in 2024, 1.9% in 2025, and 2.0% in 2026.

Headline inflation has fallen, the report stated, driven by decreased external price pressures, and is forecasted to reach 2.1% in 2025.

The labour market remains resilient, with wage growth responding to tight labour conditions.  Unemployment is set to rise slightly to 4.8% in 2024, but remain below 5% out to 2026, added the report.

GDP contracted in Q1-Q3 2023 due to weakened cross-border and offshore exports, notably in pharmaceutical and Information and communication technology (ICT) manufacturing. However, GDP is an inadequate indicator of Ireland’s economic conditions; metrics like modified domestic demand (MDD) and employment provide a more accurate assessment, explained the bank.

The growth outlook is uncertain, with downside risks, especially contingent on the rebound in key sectors like pharma and ICT manufacturing in 2024.

Higher policy rates are increasingly affecting retail rates on loans and deposits for Irish consumers and businesses, highlighted the report. This shift is influencing credit demand and preferences for liquidity, prompting a small movement from low/no-interest overnight deposits to higher-yield term and notice deposits.

According to the bank, the broader monetary policy tightening over the last 18 months is contributing to this impact, affecting retail interest rates and placing pressure on demand conditions in both Ireland and its major trading partners.

Finally, the report suggested that domestic policy must prioritise maintaining near-to-medium-term macro-financial stability. Authorities should avoid exacerbating remaining imbalances between domestic demand and supply, and leverage the opportunity to achieve stability while addressing crucial housing, infrastructure and decarbonisation needs to mitigate the impact of climate change.

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