Looking over the Horizon: Governor Makhlouf on the Long-Term Outlook for the Irish Economy

Governor of the Central Bank of Ireland Gabriel Makhlouf today (Tuesday) spoke, and held a question and answer session with students, at University College Cork, following a meeting of the Central Bank Commission.

In his first speech of 2024, and addressing students, staff and guests, Governor Makhlouf said: “We at the Central Bank of Ireland will shortly set out our updated outlook for economic activity and inflation in Ireland over the next three years. It is important however, to also consider the performance of the economy over a much longer time horizon – what have been the key determinants of growth over the last 100 years and what key factors will shape the economy’s prospects for the next half century?

“Several major structural changes already underway will shape the long-term growth prospects for the economy over the next 50 years.

“First, demographic change and ageing.  Ageing is one of the greatest success stories for modern society. Advances in public health, medicine, and living conditions means people are living much longer lives. Across the world, populations are ageing. This presents challenges and opportunities for policymakers in Ireland and Europe.

“The demographic dividend which has underpinned growth in the Irish economy over the last fifty years is fading and will ebb further as the population ages rapidly from the end of this decade.

“Second, climate change is a major structural force that is tangibly affecting the economy and broader society. As confirmed recently, the average global temperature in 2023 was the warmest since records began in 1850, and in Ireland, 2023 was also the warmest year on record since data were collected 124 years ago.

“Third, the rapid advance in the development and use of digital technologies represents one of the most profound changes in the global economy over the last 25 years.

“Finally, the issue of global trade fragmentation, which is potentially the factor we can influence the most.  As a small open economy with an export-led growth model, the Irish economy is more exposed than others to negative external shocks arising from reduced global trade integration.

“Achieving sustainable economic growth that delivers improvements in living standards for the community as a whole, while at the same time the economy goes through these major structural transitions, undoubtedly presents government and policymakers with a tough task.

“I see three key considerations for government and policy makers tasked with navigating the challenges ahead. Each of these involve inherent trade-offs and difficult choices to ensure that policy decisions enhance the economy’s resilience.

“First, policy choices should strive to reconcile short-term priorities with long-term objectives.

“In relation to ageing, acting now while the demographic structure is relatively favourable and tax revenues are strong will make the transition to an older population structure more manageable and less costly.

“Similarly, addressing the climate transition will require substantial increases in public and private investment but delaying the necessary action would result in a more costly transition – environmentally and economically – in the longer term. In this context, the recent decision in Budget 2024 to establish the Future Ireland Fund (FIF) and the Infrastructure, Climate and Nature Fund (ICNF), with the use of excess corporation tax receipts, is a welcome step.

“Second, with the economy operating in-line with its current medium-term potential, achieving the necessary scale of investment in housing and climate-related priorities, in addition to others, will require careful management and trade-offs to avoid unnecessary inflationary pressures over the medium term.

“This points to the importance of the Government recommitting to compliance with its 5 per cent net expenditure rule when setting its budgetary plans. Given the known demands on public resources that are emerging, it may be prudent to consider introducing measures that would contribute to increasing government revenue as a share of national income and broadening the tax base, in line with the recommendations of the Commission on Taxation.

“Lastly, it is clear that Ireland’s infrastructure in housing and other areas has not kept pace with the growth in population. This may be reducing labour supply by discouraging much needed inward migration. In addition to additional investment, there is an important role for policy in improving the planning, development and delivery of infrastructure at scale.

“In relation to the labour market, investment in human capital, skills and life-long learning is instrumental in ensuring that the workforce and the economy as a whole can adjust to, and take advantage of, the opportunities of the climate and digital transitions. Policies that promote the retraining of workers and improve labour mobility are paramount, as recommended by the National Competitiveness Council and OECD, and acknowledged in Ireland’s National AI Strategy.

“Similarly for firms, a focus on investment in research and development and fostering innovation would improve productivity, better enabling firms to adjust to the green transition and digitalisation.

“A more fragmented global trading environment and where state aid rules are excessively relaxed would present a competitiveness challenge to the Irish economy and a threat to its ability to attract continuing high levels of inward FDI.  This further points to the importance of improving the productivity and competitiveness of the economy to ensure it can deliver sustainable economic growth for the community as a whole over the longer term.”

Commenting on the recent ECB rate decision , Governor Makhlouf noted: “Following our latest meeting, my colleagues and I (on the ECB Governing Council) decided to keep the three key ECB interest rates unchanged. The past interest rate increases continue to be transmitted forcefully to the economy. Tighter financing conditions are dampening demand, and this is helping to push down inflation. We Governing Council consider that policy rates are now at levels that, if maintained for a sufficiently long duration, will make a substantial contribution to bringing euro area inflation back to target. Looking ahead, we should remain open-minded about the rate path, which is the essence of data dependence.  With disinflation well underway, we are confident in sustainably reaching our target of 2 per cent.”

The Governor's remarks can be read in full here.