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Sun, 17 Dec, 2023 - 18:07

Another strange and challenging year for the Irish economy appears to be ending on a generally positive note with employment growing, inflation easing, and signs that incomes will rise and borrowing costs will fall in 2024.

This year has been another strange year in many ways. A move into recession signalled by the prospect of the first material full year drop in GDP since 2009, and only the fourth decline in the past 30 years, might suggest a return to the bad old days of the financial crisis.

However, a sharp, specific, and likely one-off correction in the activities of a couple of multinational companies has not led to a broadly based worsening of economic conditions.

A likely fall of around 2% in Irish GDP, on my reckoning, is not without significance.

At very least, it reminds us that the fortunes of multinational companies can fluctuate markedly, but the broader evidence from trends in employment and tax revenues emanating from Ireland’s multinational sector remains encouragingly positive.

The economy looks set to markedly underperform other economies in terms of GDP, but it is continuing to outperform on employment growth and on the health of the public finances.

If the expected drop in GDP can be regarded as largely technical, the economy had to weather serious challenges.

A key element for most economies is the continuing impact from energy and food price inflation: The cost-of-living crisis continues to weigh heavily on sentiment and spending power.

Aggregate Irish household incomes remained broadly flat in inflation-adjusted terms, but because the number of households has increased significantly, the average Irish household is about 5% worse in real terms over the past two years.

That’s a very significant deterioration for many families who struggle to make ends meet each month.

It would have been markedly greater without the substantial fiscal supports.

In these exceptional circumstances, it is altogether preferable that fiscal policy is criticised for gimmicks than for being Grinch-like.

The good news is that the worst seems over on the inflation front.

Although the cost surge of the past couple of years is unlikely to fully reverse, an expected easing in inflation will markedly improve the purchasing power of most Irish households and help Irish businesses.

Because global price pressures are now easing, there are signs that central banks will start to reverse some of their dramatic interest rate increases.

Last week, the US Federal Reserve signalled the prospect of three rate cuts in 2024, but markets believe the fall in US rates will be faster and go much further.

Although inflation is notably lower and activity altogether weaker in the eurozone than the US, the European Central Bank (ECB) suggested it will adopt a much more cautious approach.

However, the ECB will be forced to alter its approach and cut rates, probably starting in the spring, and continuing through the year.

With lower energy costs, slower inflation, and cheaper borrowing, 2024 should provide some welcome respite for many Irish consumers and firms.

However, the main momentum in the Irish economy looks set to come from a still-healthy jobs market and a much-needed increase in public investment in critical infrastructure.

How successfully the Irish economy weathers the next shocks and strains that are now a feature of an increasingly uncertain world will significantly depend on how active, how ambitious, and how forward-looking Irish fiscal policy will be.

Such a framework will require foundations much stronger than an arbitrary fiscal rule.

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