Matt Shanahan (Waterford, Independent)
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17. To ask the Minister for Finance the concerns that he may have regarding recent reports that Ireland’s domestic economy has contracted by 1% quarter-on-quarter in the first three months of the year; the steps that he and his Department are taking to ensure rising inflation does not spiral beyond manageable levels; and if he will make a statement on the matter. [31006/22]

Paschal Donohoe (Dublin Central, Fine Gael)
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The first quarter of this year was a weak one for the domestic economy. This was a result of numerous headwinds at the start of the year, including the Omicron wave of the virus, inflationary pressures, and the high level of uncertainty stemming from the war in Ukraine.

Modified domestic demand, my preferred measure of domestic economic activity, declined by -1 per cent in the first quarter. Consumer spending, a major component of MDD, decreased by -0.7 per cent, reflecting the impact of restrictions that were in place in the early part of the first quarter along with the weakness in consumer sentiment and the spike in prices following the outbreak of the war in Ukraine in the latter part. Business investment softened somewhat in the first quarter, although we did see strong growth in new housing investment. This followed a very high level of business investment in the fourth quarter of last year.

The weak first quarter for the domestic economy comes at a time of unprecedented geopolitical instability and uncertainty. The onset of the war in Ukraine and the associated economic and financial sanctions represent a large ‘supply-side’ shock to the world economy, one which has resulted in inflationary pressures rising sharply – and globally – as a result. Consumer price inflation in Ireland rose to a multi-decade high of 8.3 per cent in May.

The Government has responded to help ease the impact of price rises, with the announcement of €2.4 billion in measures to address the cost of living to date including measures announced in Budget 2022. The Government will continue working to ensure the fall-out is minimised for those who are least-equipped to respond, but we cannot shield all households and businesses from the entirety of the impact.

On a positive note, the labour market has remained resilient despite these challenges. Employment levels were very strong in the first quarter, with a record 2½ million people in employment. Wages are rising, with total earnings up 2½ per cent over the first quarter. The external side of the economy also continues to perform very strongly with exports in the quarter exceeding €150 billion.