What is the outlook of the economy

The domestic economy continues to grow in early 2024, but weak external demand and domestic capacity constraints are expected to weigh on the pace of growth over the forecast horizon. Exports produced in Ireland declined in 2023 but should recover in 2024 and beyond, driven by a return to growth in pharmaceutical trade. Modified Domestic Demand (MDD) is forecast to grow from 2024 to 2026 by 2 per cent per annum on average, underpinned by continuing growth in consumer spending and residential construction. Developments in several forces currently restraining economic growth influence the outlook out to 2026, namely the transmission of monetary policy, sectoral developments in the pharmaceuticals and ICT sectors and capacity constraints in the domestic economy.

Unemployment forecast in Ireland

Low unemployment with rising labour force participation and continued net inward migration indicate that the labour market is operating at full capacity. Employment growth has slowed, but the unemployment rate remains close to all-time lows. Contingent on our projections for modest economic growth, the unemployment rate is expected to average 4.5 per cent out to 2026. Tight labour market conditions are forecast to underpin nominal wage growth of 4.7 per cent per annum on average from 2024-2026.

Inflation rate forecast

Domestic factors have become the dominant influences on inflation as externally driven price pressures have faded. The latter is particularly evident in energy inflation. In contrast, services inflation remains above 5 per cent and is projected to decline only gradually out to 2026. A continuation of declining price pressures for energy and non-energy goods is expected to reduce headline inflation to 2 per cent for 2024. More persistent domestic price pressures – as reflected in services inflation – are forecast to result in core inflation exceeding the projection for headline inflation out to 2026.

Risks to the growth outlook are tilted to the downside, with risks to the inflation outlook broadly balanced. The large supply-demand imbalances that characterised the economy in 2021 and 2022 have been gradually resolved to date in an orderly way with inflation falling, unemployment staying low and wage pressures being contained. Several risks, if realised, could cause the economy to deviate from the current projected path of stable growth and lower inflation. With geopolitical tensions remaining elevated, energy prices could diverge from their current downward trend, putting renewed upward pressure on inflation. A more protracted period of low growth in the global economy than currently envisaged also presents downside risk to the Irish growth outlook. Increases in labour costs above productivity could generate excessive domestic inflationary pressures. Delayed progress in addressing capacity constraints in housing and other infrastructure could generate higher and more persistent price and wage inflation and damage competitiveness. A downturn in the pharmaceutical or ICT sectors would weaken net exports, domestic investment, tax revenue and economic activity more broadly relative to the central forecasts.

Courtesy of Central Bank of Ireland Quarterly Bulletin Q1 2024 | Central Bank of Ireland