Labour shortages and capacity constraints to restrict growth in 2024, warn Davy

Stockbroker Davy has downgraded its growth forecast for the Irish economy on the back of what it described “as volatile data relating to exports and the multinational sector”.

The firm also warned that “labour shortages and capacity pressures” were likely to restrict growth from next year on.

In its latest assessment of the economic outlook, the broker said it expected growth, in gross domestic product (GDP) terms, to be 5.5 per cent this year, down from a previous forecast of 6.9 per cent. The downgrade “reflects revisions and volatile data on export performance and the multinational sector”, it said.

The lower forecast comes on the back of a sharp slowdown in manufacturing triggered by weaker global demand. The slump has hit pharma exports here, triggering revisions in GDP forecasts. The Economic and Social Research Institute last week revised its growth forecast for 2023 down to just 0.5 per cent, from 5.5 per cent previously.

Pat Kenny’s ‘last great spin on the roundabout’ is a slow-burn success story for Irish radio

---

Taxation on investments: What changes might be on the way?

---

Will AI replace stock market analysts?

---

Ibec wants end to retirement relief ceiling

---

What are the key challenges when attracting new investment here?

Listen | 50:49

In its report, Davy remained bullish on the performance of the domestic economy, suggesting it was continuing to grow rapidly and has proved “far more resilient, than we had expected, to the real wage squeeze from elevated inflation”.

As a result, it revised its forecasts upwards for employment growth (4.2 per cent), consumer spending (5.3 per cent), and modified domestic demand (3.4 per cent). The latter measure is considered a more accurate barometer of domestic activity.

The rapid expansion to date would, however, slow in 2024 as “labour shortages and capacity pressures will inevitably hold back growth”. GDP is expected to slow to 4.5 per cent next year while modified domestic demand is expected to slow to just 2.5 per cent.

“Ireland’s exceptionally rapid pace of jobs growth has been facilitated by strong net inward migration, participation rates rising to record levels and accompanied by historically high vacancy rates,” said Davy chief economist Conall MacCoille.

He also warned that interest rate hikes would eventually prove a drag on investment, especially in commercial property.

Davy expects inflation to average 5.5 per cent this year, down from 7.8 per cent last year, and to average 2.8 per cent next year. The European Central Bank is expected to increase interest rates by a further 0.25 per cent later this month as it attempts to tame high levels of price growth across the bloc.

Package worth €5bn

On the public finances, Davy predicted the Government’s budget surplus would grow to €12 billion (2.2 per cent of GDP) this year and to €16 billion (2.8 per cent of GDP) in 2024.

“This reflects our view that tax revenues will grow by 10 per cent this year, faster than assumed in the April Stability Programme Update projections,” said Mr MacCoille.

“However, we also believe that voted expenditure will grow faster in 2024, by 3 per cent, as Budget 2024 implements further spending increases,” he said.

Davy’s latest assessment comes amid reports the Government is planning a tax-and-spend package worth more than €5 billion in the budget later this year.

Despite several warnings that the economy is now at risk of overheating, the Coalition is said to be planning to increase spending by €4 billion next year and cut taxes by about €1 billion.