EY Economic Eye: Domestic Economy In Good Health, Low Inflation, Record Employment and Favourable Growth Outlook

• EY forecasts Modified Domestic Demand to grow by 2.3% in 2024 and 3.2% in 2025; GDP to decline by 0.3% in 2024, rebound to 4.5% growth in 2025 projected
• Employment growth revised up to 2.2% in 2024 and 1.8% in 2025; wage growth of 4.5% forecast in 2025
• Inflation averaging 2.4% in 2024, reducing to 2% in 2025
• Northern Ireland economy forecast to grow by 1.1% in 2024, increasing to 1.8% in 2025

Dublin, 25 September 2024: The Irish economy is continuing to perform well in spite of flat headline GDP according to the latest EY Economic Eye projections, with strong domestic growth and buoyant tax receipts, combined with record numbers in employment and low inflation for the rest of the year and into 2025.

Economic activity in the domestic economy, as measured by Modified Domestic Demand, is forecast to grow by 2.3% this year, increasing to 3.2% in 2025. Ongoing volatility in the multinational sector means a slight reduction in GDP by 0.3% is expected for 2024, however this is forecast to rebound strongly in 2025, increasing by 4.5%.

The number of people employed in ROI stood at 2.75 million in the second quarter of 2024, with income tax receipts indicating hiring continued in the third quarter. EY’s autumn forecast has revised up employment, with growth now projected to reach 2.2% this year and 1.8% in 2025. Job vacancies have eased indicating some softness in hiring into the future, however, the unemployment rate is projected to remain low by historical standards (4.4% this year and 4.6% next year), and our autumn forecast envisages solid wage gains of 4.5% on average in 2025.

After a challenging 2023, the Northern Ireland economy has fared better in 2024. EY forecasts that the economy will grow by 1.1% this year and by 1.8% next year, with employment to increase by 1.0% in 2024 and 0.7% in 2025. The Stormont Executive’s focus on growing a competitive and sustainable economy in its recently published draft Programme for Government is welcome, albeit its finances are strained. 

Dr. Loretta O’Sullivan, EY Ireland Chief Economist, says:

“Right now, the ‘vibes’ the Irish economy are giving are pretty good. Consumers are spending, businesses are hiring, exports are rebounding, and tax receipts are buoyant. While GDP is exhibiting some weakness, a host of other metrics indicate that the economy is doing well. Modified Domestic Demand was up in the first half of the year, inflation is back at rates consistent with price stability, the unemployment rate is low, and the tax take is high. There are headwinds of course, some external and some home-grown, but the growth outlook is favourable in the main.”

“Job and wage gains are expected to continue over the forecast horizon, supporting consumer spending, with an anticipated ‘Budget boost’ in the offing for households next week. As the cost of borrowing is an important driver of business spending, more favourable financing conditions as the European Central Bank loosens monetary policy should help lift investment, along with a sustained focus on infrastructure delivery and key digitalisation and decarbonisation agendas. Exports are expanding again too, and prospects for trading partners are broadly favourable.

“The headline fiscal position masks underlying vulnerabilities however, and the so-called ‘four Ds’ - demographic change, decarbonisation, digitalisation and the risk of de-globalisation - are known challenges. Spare capacity in the economy is also relatively limited at present.”

Carol Murphy, Partner and Head of Markets at EY Ireland, says:

“The latest EY CEO Outlook Pulse survey of 1,200 executives globally finds a broad confidence among leaders. They are prepared to act and adapt to take advantage and grow in a business environment that is being transformed by emerging technologies and shifting consumer expectations, while also managing geopolitical and other uncertainties.”

Shifts from Monetary to Fiscal Policy

All eyes have been on the US Federal Reserve, the European Central Bank and the Bank of England in September. With headline inflation in the US, Euro area and UK flirting with the 2% target, to cut, or not to cut interest rates, was the question at the respective monetary policy meetings. In the end, the Fed went big, the ECB moved again, and the Bank of England stayed on hold. With downward movement on global interest rates, the focus is increasingly turning to Finance Minsters and politicians, with the ‘year of elections’ potentially continuing into 2025.

Dr Loretta O’Sullivan says: “Three of the main central banks are now in loosening mode, which is good news for households and businesses. Looking ahead, the near-term path is down but back-to-back interest rate cuts are not guaranteed. While ‘doves’ are worried about the risks to economic growth from moving too slowly, ‘hawks’ are warning about lingering services inflation and the risks of moving too fast.

“The Irish Minister for Finance and the UK Chancellor of the Exchequer will both be presenting their first budgets next month. Strong public coffers in Ireland mean there is scope to provide additional support to households and firms, improve public services and further invest in infrastructure. More strained public finances in UK will leave Chancellor Reeves with little room for manoeuvre, while the purse strings are tight for the Stormont Executive.”

“At a global level, trade and investment policies have become more inward-orientated something that has come into sharper than ever focus in this ‘year of elections’. Competition among jurisdictions has intensified, and with industrial policy re-emerging the world over policymakers here will need to evaluate how Ireland can most effectively compete in terms of its grant, incentives and tax credit regime. Advocating for rules-based world trade and investment that promotes openness, competitiveness, and multilateralism in European and international fora will be central to Ireland’s continued success”.

Prospects Improving for Northern Irish Economy

The NI economy has fared relatively well in 2024 to date. The Purchasing Managers’ Index and solid employment gains point to expanding activity, and with easing inflation helping real incomes and financing conditions improving as the Bank of England gradually reduces interest rates, growth is projected to pick up further in 2025. The Stormont Executive’s focus on growing a competitive and sustainable economy in its recently published draft Programme for Government is also welcome, albeit its finances are strained. This is the case in the UK too, with tax increases a possibility when the new Chancellor announces her Autumn Budget.

Rob Heron, EY Northern Ireland Managing Partner says “The emphasis on unlocking the economy’s potential and increasing prosperity in the Executive’s blueprint for Northern Ireland is encouraging. Our EY Entrepreneur of the Year programme is in a similar vein, nurturing entrepreneurship among businesses across the island of Ireland to drive growth and investment.”

Read or download our latest forecast here.

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