Irish economy could be headed for another technical recession

The Irish economy could experience another technical recession this year, according to Bank of Ireland.

In its latest economic outlook the bank revised down its forecast for GDP (gross domestic product) growth this year to 1 per cent, citing “measurement distortions related to the multinational sector”.

The more modest growth outlook reflects a fall-off in contract manufacturing – a practice that sees multinational firms here contract third parties abroad to produce goods on their behalf – rather than a slowdown in domestic activity, it said.

The anomaly could result in a contraction in GDP in 2024, the bank warned, albeit with consumer spending, employment and most macroeconomic indicators “seeing a solid expansion”.

The forecast underlines why GDP – long used by investors and governments as the key measure of the health of an economy – is such a difficult metric to use when it comes to Ireland. Given the influence of multinationals here, GDP can swing sharply from quarter to quarter with little impact on the real economy overall. In 2023 GDP contracted on the back of a fall-off in multinational exports mainly in the pharma sector, resulting in a technical recession. Modified domestic demand (MDD), a more accurate gauge of domestic activity, remained positive, however.

Bank of Ireland expects MDD to expand by 2.5 per cent this year as wages grow faster than inflation, boosting consumer spending in the process. It noted the tax cuts contained in Budget 2024 (worth 2 per cent close to the average wage) would also underscore an increase in disposable incomes.

“A tailwind is that wages are now rising faster than inflation, helping households’ real incomes, also aided by the tax cuts in Budget 2024. The gradual recovery in the euro area and UK is also helping, as is the rapid growth in public spending,” said Bank of Ireland chief economist Conall MacCoille.

“For now Ireland’s pay growth and CPI inflation figures have not stood out from Europe – suggesting little threat to competitiveness so far,” he said. “However, given the advanced stage of Ireland’s economic cycle the key risk now is potential overheating from capacity pressures, housing and infrastructure bottlenecks and labour shortages. There is a risk of persistently high inflation in Ireland even as it recedes in Europe allowing the ECB to cut interest rates.”

In its latest commentary Bank of Ireland predicted house prices would rise by 4 per cent this year despite housing completions accelerating to 37,000 units this year, 41,000 in 2025 and 45,000 in 2026. “Despite this improvement in homebuilding levels it will still likely fall short of buoyant housing demand,” the lender warned.

House price inflation has regained momentum reflecting the exceptionally low level of supply, it said, but also pay growth of 4-5 per cent which was “translating into homebuyers taking on higher levels of debt”.

In April the average mortgage approval was €313,200, up 4.6 per cent on the year.