In this blog NERI Co-director, Dr. Tom McDonnell summarises the main points of his latest NERI Report on how the economy did in 2023 and projections for 2024.
The latest NERI Economic Report takes a look back at how the economy did in 2023 and offers some projections for 2024.
The economy has held up pretty well in recent years given the range of shocks thrown at it. The export sector has performed particularly well although there was some retrenchment this year following a period of spectacular growth. The labour market and economy are stronger now in many respects than they were before the onset of the pandemic.
But the post-pandemic bounce has ended. The scale of recent employment growth was never sustainable and reflected very specific dynamics. In particular, the post-Covid period of realised pent-up demand has now concluded and household savings have returned to the historical average. This process cannot be replicated. In addition, and as mentioned, there is now retrenchment in the pharmaceuticals and ICT sectors. At the same time, cost of living pressure has eroded consumer confidence and is constraining demand.
What about next year?
A relatively weak external environment will dampen export potential in 2024 while the unwinding of the savings rate restricts the scope for household consumption to rise by much more than disposable income. High interest rates will create a drag on investment and raise concern about higher than normal levels of business failure, although the pressure will hopefully recede over the course of 2024 as monetary policy gradually loosens. A related concern is the potential impact of high interest rates on housing supply and on the market’s ability to address capacity constraints in infrastructure.
Our baseline view is that the economy will continue to grow in 2024 but will do so at a more ‘normal’ pace compared to the volatile 2020 to 2023 period. Modified domestic demand is set to grow by close to 2%. Price growth should continue to decelerate over the course of 2024 and this will boost consumer and business confidence and lead to a gradual loosening of the ECB’s monetary policy over the course of the year.
The restoration of real wage growth as a tight labour market interacts with price growth deceleration will improve household finances and consumer confidence and ultimately support domestic demand. Employment growth and Budget 2024 will also add to demand and the public finances are well placed to respond to recessionary concerns if required. Budget 2025 is likely to be a ‘political’ and therefore expansionary budget coming as it does just before a scheduled election.
Might 2024 be the first relatively ‘normal’ year for the economy during the 2020s?