The European Commission has revised upwards its expectation for the performance of the Irish economy, according to its Winter 2023 Economic Forecast.

Ireland's real GDP growth for 2023 is revised upwards to 4.9%, with 4.1% growth pencilled in for 2024.

“Going forward, sentiment indicators point to an improving outlook, partly driven by falling inflation towards the end of the year,” according to Commission economists.

The Commission estimates that almost one year after Russia launched its war of aggression against Ukraine, the EU economy entered 2023 on a better footing than projected last autumn. The Winter Forecast lifts the growth outlook for this year to 0.8% in the EU and 0.9% in the euro area.

Both areas are now set to narrowly avoid the technical recession that was anticipated for the turn of the year. The forecast also slightly lowers the projections for inflation for both 2023 and 2024.

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On Ireland’s economy, the Commission notes that real GDP expanded rapidly in the fourth quarter of 2022, by 3.5% q-o-q, leading to an estimated annual growth of 12.2% in 2022.

Going forward, sentiment indicators point to an improving outlook, partly driven by falling inflation towards the end of 2022.

The Commission report states: “The Irish labour market continues to perform very well, with the unemployment rate at 4.3% in December. Despite news on some big tech companies reducing their staff worldwide, with yet no visible negative impact in Ireland where the multinational sector has increased employment in 2022 by 9%. Employment expectations in December were also improving.

“A strong labour market together with very high household savings underpin further private consumption growth. Foreign investment in the first half of 2023 is set to be strong, as signalled IDA Ireland, while a slightly brighter global outlook is set to support exports.

“HICP inflation is set to remain high at the beginning of this year and to gradually subside thereafter, to 4.4% in 2023 as a whole and 2.1% in 2024.“

For the wider European Union economy, the Commission's view is that the annual growth rate for 2022 is now estimated at 3.5% in both the EU and the euro area.

Continued diversification of supply sources and a sharp drop in consumption have left gas storage levels above the seasonal average of past years, and wholesale gas prices have fallen well below pre-war levels.

In addition, the EU labour market has continued to perform strongly, with the unemployment rate remaining at its all-time low of 6.1% until the end of 2022.

“Confidence is improving and January surveys suggest that economic activity is also set to avoid a contraction in the first quarter of 2023,” says the Commission.

“However, headwinds remain strong. Consumers and businesses continue to face high energy costs and core inflation (headline inflation excluding energy and unprocessed food) was still rising in January, further eroding households' purchasing power.

“As inflationary pressures persist, monetary tightening is set to continue, weighing on business activity and exerting a drag on investment.”

After reaching an all-time high of 10.6% in October, inflation has decreased, with the January flash estimate down to 8.5% in the euro area. The decline was driven mainly by falling energy inflation, while core inflation has not yet peaked.

The Commission’s inflation forecast has been revised slightly downwards compared to autumn, mainly reflecting developments in the energy market.

Headline inflation is forecast to fall from 9.2% in 2022 to 6.4% in 2023 and to 2.8% in 2024 in the EU.

In the euro area, it is projected to decelerate from 8.4% in 2022 to 5.6% in 2023 and to 2.5% in 2024.

Paolo Gentiloni, Commissioner for Economy, commented: “The EU economy beat expectations last year. We have entered 2023 on a firmer footing than anticipated: the risks of recession and gas shortages have faded and unemployment remains at a record low.

“Yet Europeans still face a difficult period ahead. Growth is still expected to slow down on the back of powerful headwinds and inflation will relinquish its grip on purchasing power only gradually over the coming quarters.”