Ireland’s Domestic Economy: Navigating the Challenges of Inflation, Interest Rates, and Infrastructure

Ireland’s domestic economy is expected to see solid growth in the next two years, with modified domestic demand (MDD) predicted to increase by 2.3% this year and 2.5% next year. The MDD measurement provides a more accurate representation of domestic economic activity by eliminating the impact of multinational companies on Ireland’s economy.

Inflation and higher interest rates affected spending and investment in 2022, leading to a slow growth rate of just 0.5% for MDD. Despite recovering strongly from the pandemic, the economy slowed significantly in 2023 due to higher inflation putting a strain on households and limiting real pay growth. Real pay, adjusted for inflation, is an important measure of changes in living standards and is essential for economic growth and stability.

Gross Domestic Product (GDP) is often used as a measure of economic performance but is heavily distorted by multinational activities in Ireland. In 2023, Irish GDP actually shrank by 3.2%, reflecting the impact of US pharmaceutical firms coming off their pandemic highs. The ESRI anticipates a rebound in Irish GDP over the next two years as global trade improves.

Addressing infrastructure bottlenecks was highlighted as a critical challenge for Ireland’s economy moving forward by the think tank. This includes issues related to housebuilding, renewable energy, and public transport such as plans for an underground rail link between Dublin Airport and the city center that have been in development for over 20 years, emphasizing the need for timely and efficient infrastructure development to support economic growth and prosperity in Ireland