Irish economy will contract this year, says EU commission

Economic activity is predicted to return to growth next year, rising by 4pc, and again in 2026, up 3.6pc. This will be supported by a strong labour market, low inflation, and a favourable external environment.

Ireland's public finances are forecast to normalise following the bumper corporation tax receipts this year, including the Apple €14.1bn, and also the strong increases in expenditure in an election year.

"After a decline of 5.5pc in 2023, Ireland's real GDP contracted further in the first half of 2024, mainly reflecting ongoing volatility in the multinational-dominated sectors," the commission report says.

"In contrast, modified domestic demand, which better reflects the underlying domestic economic activity in Ireland, increased by 1.9pc year on year during the same period, supported by a strong labour market.

"Preliminary GDP estimates indicate that the economy grew in the third quarter of 2024, expanding by 2pc quarter on quarter."

The forecast for modified domestic demand, which excludes the warping effect caused by exports by multinationals based here, is that it will increase by 2.7pc this year, by 2.8pc in 2025 and by 3pc in 2026.

The commission's report says the combination of steady employment growth, increases in real wages, and government support measures is expected to boost households' real disposable incomes, which will underpin a continued growth in consumption.

Irish exports rebounded in the first half of the year, led by a return to growth in pharmaceuticals, and the continued strength of services exports.

Employment remained strong in the first six months, supported by an increase in the labour supply, largely due to high net inward migration and more female participation in the workforce.

The unemployment rate remained stable at 4.4pc, and is expected to stay at that level for the foreseeable future, due to the tight labour market. Further employment growth is expected into next year and on to 2026, although at a more modest pace.

Consumer price inflation eased significantly this year, the report says, falling to 0pc in September. "It is expected to remain low with headline inflation forecast to reach 1.4pc, in 2024, 1.9pc in 2025 and 1.8pc in 2026," the report says. "However, underlying price pressures remained strong and wage growth is expected to keep core inflation elevated. As a result, HICP [Harmonised Index of Consumer Prices] inflation excluding energy and food is projected to stay above the headline rate."

The government surplus is forecast to fall to 1.4pc of GDP next year, as revenue growth slows down following the bumper one-off receipts of this year.

"While expenditure growth is set to moderate as from 2024, it is nonetheless expected to remain robust in 2025," the commission forecast says. "Based on the national budget for 2025, strong increases are assumed in public sector pay, investment and social transfers to support living standards and the provision of public goods and services.

"In 2026, the budget surplus is projected to be 1.3pc of GDP, as revenue is projected to normalise while higher levels of expenditure are expected to become entrenched."

Overall, the forecast is for the EU economy to return to modest growth after a prolonged period of stagnation. The commission's forecast projects GDP growth at 0.9pc in the EU this year, and 0.8pc in the euro area.

"Economic activity is forecast to accelerate to 1.5pc in the EU and to 1.3pc in the euro area in 2025, and to 1.8pc in the EU and 1.6pc in the euro area in 2026," it says.

"Headline inflation in the euro area is set to more than halve in 2024, from 5.4pc in 2023 to 2.4pc, before easing more gradually to 2.1pc in 2025 and 1.9pc in 2026."