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ESRI Warns of Slower Economic Growth Due to Export Decline and Inflation

The Economic and Social Research Institute (ESRI) has cautioned that the Irish economy is expected to experience slower growth this year due to a decline in exports and increased consumer spending amidst rising inflation. The think tank’s Quarterly Bulletin highlights concerns regarding potential tax cuts in the upcoming budget, advising against exceeding inflation adjustments.

Exports, particularly from multinational companies in the pharmaceutical and computer chip sectors, have witnessed a sharp decline, attributed to decreased demand for vaccines post-pandemic and trade restrictions on certain US companies selling goods to China. This export setback is expected to result in a 1.6% contraction in GDP, the first in over a decade. However, the domestic economy is anticipated to continue growing at 1.8%.

ESRI notes that GDP has previously exaggerated economic growth but is now understating domestic growth. Nevertheless, the forecast for domestic economic growth has also been revised downward, partly due to the impact of inflation on consumer spending and higher interest rates hampering investment.

Consumer Price Inflation is projected to average 6% this year before easing to 3.2% next year, with inflation spreading across various sectors, leading to what economists refer to as “second round effects.”

ESRI expects income growth of 4.8% this year and 5.8% next year, underlining the importance of adhering to prudent fiscal policies. The think tank also emphasises the need for tax policies that prevent fiscal drag and advocates for catch-up capital expenditures to align with economic growth. The forecasts incorporate public finance surpluses of €8 billion this year and €13.2 billion next year, with a €4 billion allocation in both years for a government investment plan.

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