Workers' incomes set to rise this year and next as wages rise and inflation falls - ESRI

Workers in Ireland should see their incomes rise in real terms both this year and next, due to falling inflation and ongoing increases in wages.

The Economic and Social Research Institute is forecasting that on average earnings should rise by more than 4% this year and closer to 5% next year.

But this will be offset by inflation which will drop this year to 2.3%, before decreasing further to 1.9% in 2025.

As a result, in its Summer Quarterly Economic Commentary, the ESRI is forecasting that workers' earnings should in real terms rise by 2.2% in 2024 and 3.1% next year.

"For the first time in two years, Irish households will see an increase in real wages in both 2024 and 2025," said Kieran McQuinn, co-author of the report.

"This will support increased consumption levels in the domestic economy."

Overall, the ESRI is forecasting robust growth across all the main economic indicators this year and next, driven by a better than expected international outlook and solid domestic expansion.

The economy as measured by Modified Domestic Demand (MDD), which is considered to be the most accurate measure of the underlying domestic economy, will grow by 2.2% this year, it thinks.

That is down slightly from the 2.3% it predicted when it published its Spring Quarterly Economic Commentary three months ago.

However, the institute now thinks that MDD will increase by 2.9% next year, more than it had forecast previously.

Gross Domestic Product, which is heavily influenced by the multinational enterprise sector, is expected to expand by 2.5% in 2024, and by a stronger than previously thought 3.2% next year.

"Ireland’s economy is likely to benefit from a more benign international outlook and a robust domestic performance," said co-author, Conor O’Toole of the ESRI.

"A main challenge will be addressing capacity constraints through investment without adding to price pressures."

Among those constraints, according to the research, is the labour market, which is strong and running at full capacity, with limited potential for further expansion without inward migration.

The ESRI expects unemployment to average out at 4.1% this year, before slipping further next year to 4%.

In relation to the upcoming Budget, the institute says care will have to be taken to ensure that fiscal policy does not exacerbate the capacity constraints which may arise and lead to inflationary pressures.

"As noted in the previous Commentary, significant investment is required in the domestic economy across a number of sectors," the research states.

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"Therefore, it is imperative that fiscal policy be disciplined to ensure that, while the Government increases expenditure particularly in investment, it does not additionally stimulate the economy in other areas such as taxation policy."

Mr McQuinn said if the Government puts a lot of money into the economy by cutting taxation rates and through higher investment, it will exacerbate the possibility of domestically sourced inflation.

However, he said the ESRI would have "no issue" with tax or social welfare bands being fully indexed to take account of inflation.

"It is more the issue of cutting taxation rates, would be the issue I think," he said.

"We wouldn’t have a problem per se in them adopting that policy as long as the overall taxation policy series of measures was neutral, so if you were to provide a tax break in one sense you would look to claw it back overall in another."

He added that areas in which taxes could be increased would be property, where they are taxes on wealth rather than labour.

The think tank also points to other risks, including the challenge of maintaining investment levels in the face of those capacity constraints as well as ongoing high interest rates.

It also warns that the domestic economy is facing potential geopolitical shocks from both Europe and Asia.

The analysis also says that it is evident that while housing supply is on an upward trajectory, it needs to increase at a faster pace if it is to meet the underlying demand for housing in the Irish economy.

The ESRI estimates that around 33,000 homes will be completed this year, similar to last year.

But the institute warns that elevated materials costs, labour constraints and ongoing relatively high interest rates, despite the recent cut by the ECB, are likely to continue to exert downward pressure on investment in housing.

"In addition to housing supply, critical infrastructure around the carbon transition will also draw on resources, putting pressure on labour in the construction sector in particular," it states.

The ESRI also thinks that consumption will continue to grow strongly by 2.6% this year and 3.1% next year, driven by the rise in incomes and also growth in savings seen in the early part of the year.

While exports are also to grow by around 4% this year, having recovered from a post-pandemic correction driven by inflation, higher rates and uncertainty that saw them fall -4.8% in 2023.