Ireland’s economy is expected to rebound and grow by 1.2% in 2024 and 3.6% in 2025 supported by an improvement in global trade, falling inflation and a strong labour market. Headline inflation is set to continue easing to 1.9% in 2024 and 1.8% in 2025. The budget surplus is projected to decrease marginally in 2024 and 2025.
| Indicators | 2023 | 2024 | 2025 |
|---|---|---|---|
| GDP growth (%, yoy) | -3.2 | 1.2 | 3.6 |
| Inflation (%, yoy) | 5.2 | 1.9 | 1.8 |
| Unemployment (%) | 4.3 | 4.4 | 4.4 |
| General government balance (% of GDP) | 1.7 | 1.3 | 1.2 |
| Gross public debt (% of GDP) | 43.7 | 42.5 | 41.3 |
| Current account balance (% of GDP) | 9.9 | 9.1 | 9.5 |
Economic activity set to pick up
Following periods of strong growth, Ireland’s real GDP weakened significantly in 2023, declining by 3.2%. This contraction was primarily driven by the weak performance of specific multinational-dominated sectors. Modified domestic demand, which better reflects the underlying domestic economic activity in Ireland, grew marginally by 0.5%, impacted by elevated inflation and tight financial conditions. The preliminary GDP estimate shows that the economy started to recover in the first quarter of 2024, expanding by 1.1% q-o-q.
Consumer sentiment and retail sales data indicate a modest pick-up in consumer demand in the first months of 2024. Easing inflation, a robust labour market and a recovery in real incomes are expected to support private consumption growth over the forecast horizon.
Modified investment, which removes the volatile aircraft leasing and R&D intellectual property components, declined in 2023 mainly due to a technical base effect after the completion of strong one-off investments in recent years. While modified investment remains high by historical standards, the uncertain economic outlook and tight financing conditions are expected to weigh on investment growth in 2024. An assumed improvement of financial conditions and the continued implementation of the National Development Plan point to a more positive investment outlook in 2025.
Exports are set to rebound over the forecast horizon, after a decline in 2023 due to weak external demand and sector-and-product specific factors. Pharmaceutical exports slowed down after the surge during the pandemic, and semiconductor exports also declined. Additionally, a fall in contract manufacturing - i.e. goods produced outside of Ireland on behalf of Irish resident firms - contributed to the downturn last year. Exports are set to grow in 2024 in line with global trade prospects, albeit still being held back by the negative carry-over from 2023, and to make a more significant positive contribution to growth in 2025.
Overall, GDP is expected to grow by 1.2% in 2024 and by 3.6% in 2025. Modified domestic demand is set to expand by 1.7% in 2024 and by 2.4% in 2025.
Labour market to remain tight
The labour market remains strong, but shows signs of moderation. Vacancy rates have been gradually decreasing, although they are still above their long-term average, indicating a softening of excess labour demand. The unemployment rate remained stable, at 4.4% in the first quarter of 2024, and is expected to stay low, averaging 4.4% in 2024 and 2025, due to the still tight labour market. Employment growth is set to continue over the forecast horizon, albeit at a slower pace, reflecting the continued expected growth in the domestic economy. With rising nominal wages and a slowdown in inflation, real wage growth is expected to turn positive in 2024 and continue growing in 2025.
Inflation projected to ease
Inflation has been easing rapidly in recent months, averaging 2.2% in the first quarter of 2024, mainly reflecting the transmission of lower wholesale energy prices to retail prices. Going forward, the deceleration of inflation is projected to continue, albeit less rapidly, with headline inflation forecast to reach 1.9% in 2024 and 1.8% in 2025. However, underlying price pressures remain strong and continued wage growth is expected to sustain services inflation. As a result, HICP inflation excluding energy and food is set to moderate more gradually over the forecast horizon.
Budget surplus to decline
Ireland’s general government budget registered a surplus of 1.7% of GDP in 2023, in line with the outturn of 2022. Buoyant revenue growth matched increases in public sector pay and investment.
In 2024, the surplus is forecast to decline to 1.3%. Revenue growth is projected to moderate driven by a general softening of the domestic economy. Expenditure growth is set to remain brisk as the spending drivers of 2023 persist. Measures to mitigate the economic and social impact of high energy prices are expected to decrease from 0.4% of GDP in 2023 to 0.1% of GDP in 2024.
In 2025, based on unchanged policies, revenue and expenditure growth rates are projected to revert to their long-term trend, with a broadly neutral impact on the budget surplus estimated at 1.2%.
The general government debt-to-GDP ratio is forecast to decrease from 43.7% in 2023 to 42.5% in 2024, and 41.3% in 2025. The debt ratio is projected to fall more slowly than implied by the budget surpluses due to sizeable stock-flow adjustments, resulting from a number of specificities in the Irish treasury management strategy.