Quarterly Bulletin 2022:1 – continued strong growth in demand and employment amidst positive economic outlook

• Modified domestic demand is forecast to grow by 7.1% in 2022, 5.2% in 2023 and 4.8% in 2024
• Employment is forecast to grow strongly, with the unemployment rate below 5% through 2024
• The combination of a surge in demand, supply bottlenecks and a rise in energy prices is leading to higher inflation in the near term which is expected to ease later in the year

The Central Bank has today (26 January 2022) published its first Quarterly Bulletin of 2022.

On the launch of the Quarterly Bulletin, Mark Cassidy, Director of Economics and Statistics said “Despite the emergence of the Omicron variant, the economy overall is proving resilient. With strong growth in employment and activity, the economy is already back to its pre-pandemic level, and we expect will reach its potential level of activity over our forecast horizon to 2024. The aggregate data mask the fact that some parts of the economy, particularly hospitality and the arts, are still bearing significant costs arising from Covid. The combination of a surge in demand, supply bottlenecks and the sharp rise in energy prices is leading to higher inflation in the near term. Consumer price inflation is expected to remain above the low levels seen in the decade between the financial crisis and the pandemic. However, inflation is anticipated to ease from what we see currently, as acute pandemic-related effects and energy price growth diminish in importance.”

The economy continued to pick up momentum during most of the second half of 2021, with strong employment growth and domestic spending. The level of public health restrictions during late 2021 and early 2022 were higher than expected at the time of our October Bulletin due to the emergence of the Omicron variant. While the disruption of recent weeks has dampened the pace of recovery, it has not derailed it. The central forecast in this Bulletin sees a more rapid reduction in the unemployment rate over the coming years than in previous forecasts. There will, however, likely be quite different paths forward across sectors depending on their experience through the pandemic. The ability to adapt or recover lost ground in light of changes in consumer and investor preferences, technology and ways of working, and supply chains will not be uniform across the economy.

The economy is forecast to continue to grow strongly over the projection horizon. Modified Domestic Demand is forecast to expand by about18% over 2022 to 2024, buoyed in the main by a recovery in personal consumption. Domestic demand will be supported by growth in disposable incomes and the use of some savings accumulated during the pandemic.

While domestic demand is expected to contribute more to overall GDP growth, export growth is also expected to be robust. GDP is projected to grow by 8.7% this year, 5.0% in 2023 and 6.0% in 2024.

The overall strength of the labour market recovery has been encouraging with more people in employment by Q3 2021 compared to prior to the pandemic, particularly amongst females and younger workers. The female labour force participation is at its highest level on record in Ireland, with this increase being driven in large part by those with a third-level education entering full-time jobs in high-skilled sectors. Employment is forecast to grow by 6.9% over 2022 to 2024, generating 167,000 new jobs and the unemployment rate reaching 4.6% by end 2024.

Relative changes in labour demand and supply through the pandemic have led to some wage pressures at the same time as a significant number of firms, most notably in the hospitality sector, continue to avail of the wage subsidy scheme. The extent to which wage pressures become more generalised, how firms adjust to the eventual unwinding of the wage subsidy scheme, and how migration responds in the years ahead are all issues that will affect labour market conditions and the pace at which the economy reaches capacity constraints.

Disruption to global supply chains, surging demand and the rise in energy prices remain key factors in explaining the higher rates of consumer price inflation in both Ireland and the euro area. These are expected to remain relevant over much of 2022, but still to ease later in the year. Rental costs have also been increasing at a faster rate since around the middle of last year. HICP inflation of 4.5% is now expected in 2022, with consumer price growth moderating to 2.4% in 2023 and 2.1% in 2024. The drivers of inflation are expected to change over the forecast horizon, with less of a contribution from changes in energy prices in the second half of this year, while domestic factors related to the economy reaching capacity constraints becomes more important in 2023 and 2024. The impact of higher prices will be experienced to different degrees across households, especially as energy and rents typically make up a higher proportion of expenditure by lower income households. With the emergence of further and more broad-based wage growth over time, real incomes are expected to rise through 2023 and 2024.

On balance, risks to the growth forecast are marginally to the upside. The potential of a more rapid growth in consumption and investment amidst a tighter labour market outweighs that of other risks which could have more negative economic effects, such as more persistent COVID-related uncertainty or sector-specific challenges. The latter could include negative outcomes for the agri-food sector when the UK eventually imposes border checks and tariffs, on Irish goods.

The resilience of the economy through the pandemic, alongside positive surprises in corporation tax revenues, has seen a marked improvement in the outlook for the public finances. A surplus on the General Government Balance is now expected to emerge sooner, in 2023, with a larger surplus and related improvement in the debt position in 2024. This offers an opportunity to ensure that the overarching fiscal framework and fiscal stance remains appropriate, and can sustainably support domestic macro-financial stability and resilience while addressing priorities for the community as a whole, such as climate action and housing. As the economy transitions through the pandemic and emergency supports are unwound, sustainably addressing these priorities will be important in maintaining Ireland’s competitiveness and relative attractiveness as a place to live, work and do business.

Notes

This Quarterly Bulletin also contains two signed articles -

A Signed Article by Niall McInerney titled “The Macroeconomic Implications of Climate Change for Central Banks”. This article explores the key challenges presented by climate change for central banks. Examining the economic implications of the risks associated with continuing climate change and abrupt mitigatory actions. It then reviews how these risks could affect the transmission of monetary policy through conventional channels.

 The Article is one example of the wider work being undertaken in the Central Bank of Ireland on climate change and how it impacts across our broad mandates of monetary and financial stability, consumer and investor protection, and prudential regulation. Our commitments in this area are highlighted in the Central Bank of Ireland pledge on climate action.

A Signed Article by Shane Byrne, Kenneth Devine and Yvonne McCarthy titled “Behavioural Economics and Public Policy-Making”. This Article reviews the recent growth in the application of behavioural insights, the ways in which biases can impact decision making, specifically in the financial domain, and why it matters for policymakers, including the Central Bank.

Previous Quarterly Bulletins are available to view on the Central Bank’s website.