What are the four forces shaping the 2024 economic outlook

EY’s Winter 2024 Economic Eye Report anticipates a growth uplift as inflation tracks lower and the interest rate cycle turns.

In brief

• Disinflation brings good news for households and businesses in ROI and NI.
• Economic momentum to build amid looser monetary policy and a soft global landing.
• Unemployment rates projected to remain relatively low.

2024 has just started and it has already acquired many labels. It's the year of rate cuts, war, and global elections. But for the all-island economy, it's expected to be a year of growth. EY Ireland's Winter Economic Eye report is forecasting reasonably solid growth in the Republic of Ireland (ROI) and a modest expansion in Northern Ireland (NI).

Here are four forces we see shaping the outlook in 2024:

1. A subdued external environment.

The world economy is recovering from a multitude of shocks – the Covid-19 pandemic, the war in Ukraine, and decades-high inflation. The likelihood of a soft landing has increased but geopolitical tensions, including the conflict in the Middle East and the Red Sea attacks, are among the many headwinds. Prospects for key trading partners in 2024 are mixed, with growth set to slow in the US but to pick up in the Eurozone and the UK.

2. A turn in monetary policy.

After significantly increasing interest rates in 2022-2023, the European Central Bank and the Bank of England are currently on hold. Higher borrowing costs are expected to weigh on business spending decisions in 2024. However, proactive digitalisation and decarbonisation agendas should provide support and we can look forward to rate cuts later this year. The Irish government is also undertaking a large-scale capital spending programme to enhance public infrastructure and underpin the digital and green transitions. In NI, the restoration of power sharing and a Stormont Executive is encouraging for future investment.

3. Inflation is on the retreat.

Inflation has eased significantly and the pass-through of lower wholesale energy prices to households’ bills and firms’ production costs, coupled with the transmission of monetary policy to economic activity, points to a further easing ahead. In ROI, an inflation rate of 3.0% is forecast for 2024, falling to 2.0% in 2025. This downward trend will alleviate the pressure on households' purchasing power and improve consumer confidence, which bodes well for consumer expenditure.

4.Warm labour markets.

While the ROI and NI labour markets put in a strong performance in 2023, signs of softening are beginning to emerge, and some cooling is likely this year. Nonetheless, unemployment rates are projected to remain low by historical standards and many businesses will continue to experience recruitment and retention difficulties. Given the tight labour market and some compensation for past inflation, wage increases are also anticipated in 2024.