Two-Track Economy Surging And Slipping
Irish economic growth data for Q3 2022 shows radically different economic conditions across different sectors of the Irish economy, but the broad picture is still very encouraging. Buoyant activity in the multinational sector meant GDP growth has continued on an exceptionally fast track, and the latest data suggest that Irish GDP growth seems set to be around 11% for the full year 2022, even allowing for a materially softer final quarter.
In contrast, modified final domestic demand, the most commonly used measure of activity affecting the bulk of households and businesses, fell 1.1% between Q2 and Q3. Reflecting the prospect of further weakness in Q4, it seems likely that in terms of the MDD metric we will see the fourth recession since 2018 (on the usual two consecutive declining quarters technical definition). However, this pull-back is from a relatively strong pace. A very strong start to the year means that MDD growth will likely be measured at 8% for 2022.
Alongside the adverse cost of living shock, the Irish economy is also experiencing a positive shock from notably increased multinational activity. This has translated into markedly stronger employment as well as output. In the year to the third quarter, the wage bill increased by 16.4% in the multinational sector compared with just 3.2% in domestic enterprises. A buoyant multinational sector is central to dramatically faster than expected growth in tax revenues, producing a large surplus in the public finances.
Looking ahead to 2023, the latest IMF and EU Commission forecasts both suggest a slowdown is underway in the economies of most importance to Ireland. Global developments almost mechanically imply a marked fall-off in Ireland’s economic growth next year, but it should remain stronger than in most other countries. My indicative estimates are for GDP growth of around 4% in 2023, with MDD growth slower at c.2%.
Many domesticfocussed sectors are now seeing a sharp slowdown. The key driver of tumbling consumer sentiment is a sharp fall in spending power, centred on the struggle to handle double-digit increases in grocery bills and expensive energy costs. Some rough calculations suggest the pick-up in inflation in 2022 will drain €6-7bn — or around €3,000 per household — from Irish consumer spending power, with a further inflation hit of c.€2,000 expected in 2023.
Properly calibrated fiscal support can make a substantial contribution to underpinning solid gains in activity and employment. The key question is how the combination of ample fiscal resources and some increased spare capacity in the economy can best be used to enhance medium-term growth prospects by scaling up the response to infrastructure bottlenecks, particularly in areas such as housing.