Bank of Ireland revises Economic Outlook for Ireland

• GDP growth forecast revised down to a -1% contraction for this year
• Forecast for employment growth upgraded to 2.4%
• Export sector performing well – will contribute to 3.1% GDP growth in 2025

Bank of Ireland has revised down it’s forecast for Irish GDP growth (to a -1% contraction) and modified domestic demand (2.3%) for this year, but mainly due to statistical distortions and volatile data. Ireland’s economy has expanded rapidly again in 2024, evident in the upgrade to the Bank’s forecast for employment growth to 2.4%. Beneath the statistical fog, the export sector is performing well and should contribute positively to 3.5% GDP growth in 2025.

Pay growth running at 4%-5%, exceeding CPI inflation, is helping households and should drive 3% growth in consumer spending next year. Also, the €8bn Budget 2025 package and 6.9% public spending growth, should support domestic demand next year.

One challenge is that bottlenecks and capacity pressures are becoming more pressing –evident in Bank of Ireland’s new forecast for Irish Residential Property Price Inflation, for a 7.75% rise in 2024 and 4% in 2025. The intense competition for homes is clear, with close to 40% of transaction now settled at a 10% premium over the original asking price.

Commenting, Conall Mac Coille, Group Chief Economist, Bank of Ireland said: “We have again revised down our forecasts for Irish GDP growth but this is largely due to statistical distortions related to the multinational sector and ‘contract manufacturing. A number of economic indicators on the performance of the indigenous economy point too strong growth.

“Current buoyant rates of employment and population growth are not sustainable in the longer-term, evident in pressures on housing, infrastructure and public services. Ireland’s rates of pay growth (5.6%) and house price inflation (9.6%), are now starting to stand out from other euro area countries, posing a risk to competitiveness. House prices are now at their most expensive level relative to the euro area, since 2009. In this context, Budget 2025 should be finely balanced between delivering infrastructure in a timely and cost effective fashion, whilst avoiding measures that risk overheating the economy.”

Key points on new Bank of Ireland forecast:

• Irish GDP to contract again in 2024: We have revised down our Irish GDP forecast again, to a -1% contraction this year, in the main due to the statistical distortions related to the multinational sector and ‘contract manufacturing’. That is, goods produced in other countries but where the associated profits are counted in Irish GDP. Also, the surprise fall in Irish GDP in Q2 looks erratic and we suspect it will bounce back later in the year. We now predict GDP of -1% for this year, and 3.5% for 2025.
• Rapid job creation welcome exacerbating bottlenecks and capacity pressures: We now expect Irish employment will grow by 2.4% in 2024 and 1.7% in 2025, revised up again since our last forecast in July (we had previously forecast 1.7% for 2024 and 1.5% in 2025). Notably, almost half of the growth in employment in H1 2024 was accounted for by non-Irish nationals and reflecting the exceptional 1.9% growth, or 100,000 growth in the population in the last twelve months. Whilst welcome, these rates of growth are unsustainable in the long-term, so we expect jobs growth to slow gradually in 2025.
• Export sector performing well, beneath the statistical fog: Stripping out statistical distortions suggests Ireland’s export sector is doing well, outperforming challenged conditions in global manufacturing. So far in 2024 goods export volumes are up 6%, and traditional manufacturing output by 10%. There have also been rapid gains in business services exports. We expect the export sector will begin to make a positive contribution to GDP growth again in 2025, once statistical distortions fall away.
• Consumer spending to grow 2.7% in 2024, 3% in 2025: We are forecasting pay growth of 4.5% in 2025, above CPI inflation, so households will enjoy real income growth next year contributing to 3% growth in consumer spending, even as jobs growth slows slightly. The €1.8bn of tax cuts planned for Budget 2025, higher spending on social welfare and the 6.9% growth in public expenditure, will also support demand.
• Government surplus of €8bn likely in 2024: The outlook for the public finances is extremely uncertain, given the 28% growth in corporate taxes so far in 2024, which may reflect timing effects. We have pencilled in some additional ‘one-off’ spending in the Budget, so despite buoyant tax revenues, the surplus comes in at €8bn (or 1.5% of GDP). The case for a cautious approach in Budget 2025 is copper-fastened by recent research by the Irish Fiscal Advisory Council showing just three groups accounted for over 40% of corporate tax revenues in 2022.
• Housing market: We have revised up our forecast for Residential Property Price Inflation (RPPI) to 7.75% in 2024. Our analysis shows competition for homes intensified during the summer with close to 40% of transactions now being settled at a minimum 10% premium over the original asking price. In addition, the average mortgage approval for house purchase was €318,300 in July, up 6.2% pointing to further house price gains, driven by rising wages and household incomes. Hence, we still expect a further substantial rise in house prices of 4% in 2025.

Bank of Ireland Irish Macroeconomic Forecasts