We had expected Irish GDP to contract this year, by just over 1%, but following the release of the third quarter national accounts we have revised down our forecast to -2%, with 2024 growth now projected at zero. The 1.9% fall in q3 GDP was the fourth consecutive quarterly decline , a sequence last recorded in 2009. and brought the annual contraction to -5.8%, with the final quarter unlikely to record a big rebound. Consequently the carryover into 2024 will also be negative and even with some growth through the year the average may well struggle to get into positive territory.
The path of Irish GDP has been set by multinationals for some time now and total exports have also fallen for four consecutive quarters, with some growth in services offset by large falls in merchandise trade. This appears to be related to two factors; a post- covid fall in pharma and organic chemicals, produced in Ireland, and a collapse in outsourced exports , largely made in China. As a consequence total exports in q3 were down an annual 9.8% and the October industrial production figures point to another big fall in q4. That starting point for next year means that even with some rebound, export growth may be zero or even negative again.
The weakness in multinational exports has also translated into slower growth in net profit and interest outflows so GNP, which adjusts for such flows, is growing and we expect a 3.5% rise in 2023. Official forecasts now tend to highlight domestic demand as modified to exclude the impact of certain multinational flows on capital formation and that metric too has been weaker than most expected, with zero growth over the first three quarters of the year. Consumer spending is growing, boosted by spending on autos and services, but construction spending likely fell in 2023 as a result of a decline in non-residential building, while domestic spending on machinery and equipment is also negative. We expect modified domestic demand to grow by only 0.6% but to pick up to 2.2% growth next year.
There has been some some better news on inflation, with a sharper than expected decline in November, taking the HICP measure down to 2.3%, with the average for the year likely to emerge at 5.1%. The latter could fall to 2% in 2024 absent another energy shock. CPI inflation is higher as it includes mortgage rates and that may average 6.2% for 2023 before falling faster than the HICP measure next year on the assumption interest rates have peaked.
Does the negative GDP figure matter, if largely multinational related and indeed to specific export sectors?. One impact will be on the debt ratio, which has tumbled in recent years as a result of the stellar rise in GDP but is now forecast to fall at a much slower pace given only a 2% rise in nominal GDP in 2023 -the ratio eases to 43.8% from 44.4% in 2022.The debt figure is also impacted by the Government decision to eschew a more rapid debt decline in favour of transferring surpluses to two new medium term funds to support future infrastructure spend and the impact of an ageing population on the Budget.
Weaker multinational profits could also have a major impact on the fiscal position given the importance of Corporation tax and that seemed to be materialising as as issue over the Autumn but a strong rebound in receipts in November implies the General Government surplus will emerge at around €8bn or 1.6% of our projected GDP. The Corporation tax rate is set to rise from 12.5% to 15% in 2024 and this should help to support receipts.
The most serious potential impact from falling GDP could be on the labour market but although there has been layoffs in the ICT sector overall employment growth is still rising at a rapid clip,up by 100k or 4% in the third quarter. The unemployment rate has risen, however, to 4.8% in November from 4.1% earlier in the year, but that reflects a further rise in the participation rate, with labour force growth now outpacing employment.That means the potential growth rate of the economy may well be higher than official forecasts indicate.Cracks in employment though would be much more significant than the recorded GDP figure because of its impact on household incomes, Government finances and the housing market.