30/01/2025

30/01/2025

Ireland’s Economic Outlook 2025: From Contraction to Resilient Recovery

Forecast for Ireland: Navigating Through Current Challenges

As 2025 is in full swing, Ireland's economic landscape shows signs of both resilience and challenge. The European Commission has just released its latest forecast for Ireland. This blog sets-out the main points to look out for in 2025. Overall the outlook is positive – while the growth figures derived from multinational activity are subject to fluctuation, the economy will grow, and inflation will be low but the labour market will remain tight. The Irish economy is expected to see a decline in GDP by 0.5% in 2025. This contraction is primarily attributed to a slowdown in the multinational sector during the first half of the year. However, optimism is warranted as the economy is projected to rebound robustly with growth rates of 4.0% in 2025 and 3.6% in 2026. This rebound is expected to be powered by a strong labour market, low headline inflation, and a favourable external environment.

Contraction and Recovery of Economic Activity

Ireland's economic activity clearly faced headwinds in the first half of 2024, following a notable contraction of 5.5% in 2023. This decline was significantly influenced by ongoing volatility in sectors dominated by multinational corporations. In contrast, modified domestic demand—a more accurate reflection of underlying economic activity—showed resilience with a year-on-year increase of 1.9%. Initial estimates suggest a lift in GDP in the third quarter of 2024, indicating a quarter-on-quarter growth of approximately 2.0%. Encouragingly, a combination of sustained employment growth, real wage increases, and supportive government measures are set to enhance household disposable incomes, thereby bolstering consumption throughout the forecast period.

Investment Trends

While headline investment witnessed a sharp decline in the first half of 2024—majorly impacted by fluctuations in intellectual property exports—modified investment, which excludes volatile intangible assets, reported a marginal uptick. Looking ahead, improving financial conditions and the government's commitment to fostering investment suggest a promising outlook for modified investment in the upcoming years. Although the forecast for intellectual property investment carries uncertainties, it is anticipated that it will stabilise to levels matching previous years.

Export Growth

On a positive note, Irish exports showcased resilience with a rebound in pharmaceutical trade and sustained growth in service exports. These trends are expected to drive positive contributions to economic growth, supported by a favourable international landscape and ongoing strength in key sectors, particularly pharmaceuticals and computer services.

Labour Market Dynamics

The labour market remains robust, bolstered by an increase in labour supply due to high net inward migration and heightened participation rates among women. The unemployment rate has stabilised at 4.4% in the first half of 2024, with expectations of it averaging around this level throughout the forecast period. Continued employment growth is anticipated, although at a more measured pace as the domestic economy expands.

Inflation and Public Finances

Inflation remains a critical factor to monitor, with the HICP inflation rate easing to 0.0% by September 2024, driven by decreases in energy and non-energy industrial goods prices. Inflation is projected to remain low, with rates of 1.4% in 2024, 1.9% in 2025, and 1.8% in 2026. Nevertheless, underlying price pressures and wage growth may keep core inflation elevated. Fiscal measures signal a solid outlook for public finances, with the government projected to achieve a surplus of 4.4% of GDP in 2024, primarily due to one-off revenues linked to favourable court rulings. This surplus is expected to decrease in subsequent years as these temporary factors fade, with projections of 1.4% and 1.3% for 2025 and 2026, respectively. Furthermore, Ireland’s debt-to-GDP ratio is anticipated to decrease gradually, suggesting a stabilisation of public finances.

Conclusion

In summary, the economic forecast for Ireland reveals a phased trajectory of contraction followed by robust recovery. As the nation navigates through 2025, the interplay between domestic dynamics and global economic conditions will shape its path. With supportive fiscal policies and a strong labour market, Ireland stands poised for an optimistic rebound in the years ahead.

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