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Ireland recession: Growth projected to slow but can Irish economy swerve contraction?

By Ryan Hogg

Edited by Jekaterina Drozdovica

15:06, 18 October 2022

Irish flag fluttering in a brisk breeze against a bright blue sky.
Growth projected to slow but can the Irish economy swerve contraction? Photo: L F File / Shutterstock

The Republic of Ireland has re-established itself as a leading European economic force as the Celtic Tiger roared back from the painful downturn of 2008

But with inflation making its way to the country, confidence among consumers and businesses falling, and a downward revision to gross domestic product (GDP) forecasts, is a recession in Ireland increasingly likely?

What is a recession?

A recession is technically defined as two consecutive quarters of negative economic growth, as typically measured by the GDP. The metrics is the centrepiece of economic analysis because of the ramifications it represents.

GDP typically declines as a result of falling demand, perhaps as incomes fall or prices rise. This can translate into job losses and a fall in GDP. Two consecutive falls in GDP suggests that decline may not be temporary, but the start of a longer-term downturn, hence its importance to analysts and casual observers.

A recession can be the result of a natural downturn in the business cycle after a period of rising incomes and prices. It can also come about from an exogenous shock, like the financial contagion experienced in 2007/2008 that led to a global recession and ensuing debt crisis in some countries. 

Ireland was among the worst-affected countries by the global downturn that followed, sparking a massive Ireland economic crash. The Irish economy contracted by 4.5% in 2008 and by 5.1% in 2009, according to the World Bank’s data.

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Is Ireland in a recession right now? 

An Ireland recession might not happen. Quarterly data from the Central Statistics Office showed GDP jumped by 1.8% in the second quarter of 2022, following a 6.3% jump in the first quarter

Ireland’s GDP growth rate, 2020 - 2022

While gross national product (GNP), a measure popularly used in Ireland to strip out high levels of foreign direct investment, did experience a 3.6% contraction in the first quarter of 2022 following widespread lockdowns, it increased by 2.1% in the second quarter.

Ireland’s Economic and Social Research Institute (ESRI) credited the economy’s robust growth to a strong labour market and healthy tax receipts. ESRI member Conor O’Toole wrote:

“The economy has recovered from the pandemic in a robust fashion, with the labour market recovering particularly strongly. The challenge for policymakers now will be to respond to higher inflation against a backdrop of tight labour markets and rising interest rates.”

What factors could cause an Ireland recession?

Inflation is running hot in the country, with Ireland’s consumer prices index (CPI) hitting 8.2% in September 2022. It marked the 12th straight month where prices rose faster than 5%.

Ireland is bogged down by rising energy costs as oil and gas prices soar, which feeds into the production costs of other goods.   

Ireland’s inflation is set in the context of similarly aggressive inflation in the eurozone, where the Harmonised Index of Consumer Prices (HICP) rose by 9.1% in August, reinforcing the widespread nature of high prices. 


The country’s place within the eurozone means it has to abide by wider monetary policy in the area, which is growing increasingly hawkish. The European Central Bank (ECB) has risen its base rate of interest from -0.5% to 0.75% in less than two months, its fastest pace of record, in a bid to quell rising prices.

That’s slowly filtering through to the Irish market. In the middle of October, Allied Irish Bank (AIB) became the first commercial bank in the country to pass the ECB’s rising base rate onto its customers, Reuters reported.

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The weighted average interest rate for new fixed-rate mortgage agreements in the country was 2.49% in August, according to data from the Central Bank of Ireland. While this represented a fall of 13 basis points compared to August 2021, rates could begin to climb again with AIB’s move.

That could filter into housing demand, as costs of servicing a debt on a home force more houses on the market whilst driving others away, pushing prices down and affecting confidence in the economy. There isn’t an indication of a housing crash on the horizon, but Ireland’s housing market could put more pressure on the economy than it did before.

An assessment of Ireland’s private sector also gives mixed readings for the economy. The country’s Purchasing Managers’ Index for manufacturing (PMI) was 51.5. This marks an expansion in activity, but is worryingly close to contraction territory below 50. While input cost inflation fell to a 19-month low, new orders fell at their fastest rate since January 2021. 

Likewise, PMI for Ireland’s services sector was a mixed bag. Output measured 54.1, which while a decent expansion, marked the slowest rise in the indicator’s 19-month upturn since Covid-19 restrictions were relaxed. It was also the weakest 12-month outlook for operations since October 2020, when rates of Covid-19 infections were climbing heavily and shutting down many services.

Consumer sentiment, as measured by KBC Bank, fell to a 14-year low, as consumers continued to worry about rising energy costs. In a note, economist Aaron Hughes said it shouldn’t be interpreted as conditions being the same as 14 years ago, when there was anIreland recession, noting that “instead it is signalling a sea-change in consumer thinking in relation to their economic and financial circumstances”. He added:

"The normal expectation of an improving environment built on gains in employment and incomes is now being replaced by worries around fast and furious increases across a range of living costs allied to the threat that energy might be unavailable as well as unaffordable."

Ireland economy forecasts for 2023 and beyond

If there is an Ireland recession on the horizon, no one has told the country’s analysts and decision makers, as confidence remains robust.

A recent survey by KPMG of 50 Irish CEOs found that more than two-thirds (68%) expected the economy to avoid a recession next year. 

That’s a sharp divergence from the more pessimistic outlook among CEOs globally, where 86% expect a recession in their domestic market. Additionally, global economic confidence over the next three years among the Irish CEOs sat at 71%.

In its latest quarterly bulletin, the Central Bank of Ireland (CBI) revised down its growth projections for the Irish economy, but it still appears likely there won’t be an Irish recession. The bank expected modified domestic demand (MDD), a measure similar to GNP, to grow by 6.4% in 2022, 2.3% in 2023 and 3.3% in 2024.

In June, ESRI likewise revised down growth expectations, but again, did not predict an Ireland recession. The think tank forecast MDD growth of 4.4% in 2022 and 3.7% in 2023.

The OECD is similarly optimistic about Ireland’s future growth path. In June the group forecast Ireland GDP growth of 4.8% in 2022 and 2.7% in 2023.

In its latest Ireland economy forecast compiled on 10 October, consultancy Davy Group predicted GDP in Ireland to rise by 9.4% in 2022 and 3.5% in 2023. The 2023 figure was revised down from a previous forecast of 5.8%. Davy analyst Conall MacCoille wrote:

“We now expect slower growth next year due to the squeeze from higher energy prices on consumer spending and the uncertainty created by the war in Ukraine and likely European recession

“However, as in the Covid-19 pandemic, we expect the defensive export sector will keep Irish GDP growth in positive territory – helping the public finances and housing market to stay resilient.”

The European Commission was forced to downgrade its outlook for the Irish economy for similar reasons to other groups:

“Despite the very strong first quarter reading, real GDP growth for 2022 is revised slightly down to 5.3%, while the 2023 annual growth projection is revised down to 4.0%, reflecting the deteriorating global outlook, weakening sentiment, and persisting inflationary pressures.

“The outlook for the economy is surrounded by high uncertainty also due to factors which are specific to Ireland, such as recent developments regarding the disapplication by the UK of the Protocol on Ireland / Northern Ireland under the EU-UK Withdrawal Agreement.”

Note that analysts’ predictions can be wrong and shouldn’t be used as a substitute for your own research. Always conduct your own due diligence before trading. And never trade money that you cannot afford to lose. 

FAQs

Will there be a recession in Ireland?

Analysts did not expect Ireland to enter a recession at the time of writing (18 October), but have revised down the expected rate of growth next year.

When was Ireland's last recession?

Ireland’s last recession occurred during the Covid-19 pandemic as a result of widespread lockdowns, with the economy shrinking by 6.1% between June and September 2020.

How did Ireland recover from the 2008 recession?

Ireland recovered from the 2008 recession, albeit slowly, with a lot of pain to the labour market and wages. But it has since enjoyed robust growth driven by the private sector and tech exports.

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