Irish Economy Shows Strong Recovery in 2021 and 2022, but Challenges Ahead
Recently published national accounts data by the Central Statistics Office (CSO) highlight the exceptional performance of the Irish economy in 2021 and 2022, as it rebounded strongly from the pandemic. GDP increased by 15.1% in 2021 and 9.4% last year, while modified gross national income, an indicator designed specifically to measure the size of the Irish economy, rose by 13.9% in 2021 and 6.7% in 2022. This is a significant turnaround, considering the 3.6% contraction in 2020.
The recovery was driven by both exports and the domestic economy, supported by a robust global economy, record levels of foreign direct investment, and substantial fiscal supports provided during the pandemic. Modified domestic demand increased by 7.3% in 2021 and 9.5% in 2022, recovering well from a fall of 5.9% in 2020, which reflected the negative impact of COVID-19 on domestic activity.
However, the outlook for the Irish economy in 2023 is less favorable. The pace of global growth is decelerating, interest rates are rising, inflation is high, and significant capacity constraints are emerging within the economy. Industrial production data show a sharp decline in manufacturing output from the multinational sector so far this year, following a surge in 2021 and 2022.
The value of pharmaceutical and electrical machinery exports has fallen by 18% and 34%, respectively, during the first five months of 2023 compared to the elevated levels seen in 2022. Service exports have leveled off at a high level in recent quarters. These weak export figures point to a marked slowdown in the pace of growth in the Irish economy this year. In fact, GDP contracted by 2.8% in the first quarter due to the fall in industrial production and softening external trade.
It is important to note that GDP can give a misleading picture of the underlying performance of the Irish economy. Therefore, it is crucial to use a wide range of indicators to assess how the economy is faring. Despite the challenges in exports, most indicators point to a continuing strong performance in the first half of 2023. Employment rose by 1.9% in the first quarter, and preliminary estimates from the CSO suggest that the unemployment rate fell to an all-time low of 3.8% during the second quarter.
Housing completions have continued to trend upwards in early 2023, and there was an 18% rise in new car sales up to mid-year. Retail sales, excluding the motor trade, also showed steady growth. The services reading of the purchasing managers’ index has recorded very high readings year-to-date, indicating strong activity. Foreign investments have also remained strong. Tax revenues have seen good growth, rising by 11% in the first half of 2023.
While GDP growth may be relatively weak this year due to sluggish exports, the domestic economy is continuing to perform well. Official forecasts on the Irish economy show a divergence of views on the outlook for GDP growth in 2023, with the Economic and Social Research Institute predicting a flatlining GDP with a meager 0.1% increase, while the Central Bank forecasts a 5.3% increase. However, they are more aligned on modified domestic demand, both expecting growth slightly above 3.5% in 2023.
In conclusion, the Irish economy has shown a strong recovery in 2021 and 2022, driven by exports and domestic demand. However, challenges lie ahead in 2023, with a slowdown in global growth, rising interest rates, high inflation, and capacity constraints. Despite the potential weakness in GDP growth, the domestic economy is performing well, as seen in various indicators. Continued monitoring and careful management will be crucial to navigate the uncertainties and maintain economic stability.