Quarterly Bulletin 2022:3 - Economy forecast to grow in 2022 with higher inflation impacting on households and businesses

• Growth in modified domestic demand growth is still expected in the coming years, but forecast has been revised down to 4.3% in 2022, 4.2% in 2023 and 3.8% in 2024

• Consumer price inflation has been revised up to 7.8% this year, due partially to further increases in energy prices, moderating to 4.2% in 2023 and 2.1% in 2024

• Expectation is that inflation will start to decline during the second half of this year.

The Central Bank has today (7 July 2022) published its third Quarterly Bulletin of 2022. On the launch of the Quarterly Bulletin, Acting Deputy Governor Mark Cassidy said: 

“The economy was in a good position at the start of the year, having shown considerable resilience through Covid.  However, the demand recovery from the pandemic has been tempered by the effects of the Russian invasion of Ukraine and persistent supply chain challenges. Whilst positive economic growth is still expected in 2022, higher prices and costs are already impacting negatively on households and firms. Households’ real incomes and purchasing power are expected to fall in 2022, before recovering over the following years. Relatedly, domestic consumption and investment are expected to grow at a slower pace this year and next than previously expected. Uncertainty around the medium-term outlook remains high; however, the expectation is that inflation will start to decline during the second half of this year.”

The ongoing effects of the war in Ukraine, high inflation and heightened uncertainty are reducing consumer and business confidence with signs that this is having a negative effect on spending by households and firms. Reflecting this, projections for growth in modified domestic demand remain positive, but have been revised down to 4.3% in 2022, 4.2% in 2023 and 3.8% in 2024. 

Consumer price inflation has been revised up to 7.8% in 2022 due to further increases in energy prices along with more generalised price pressures for a range of other goods and services. Current financial market expectations are for energy prices to decline in the second half of the year but to remain above pre-pandemic levels over the course of the forecast horizon. Conditional on these assumptions, inflation is forecast to moderate to 4.2% in 2023 and 2.1 % in 2024. 

The economy is still expected to grow over the forecast horizon but downside risks have increased. Employment and labour market data have been strong and tax revenue continues to grow at a fast pace. The key export sectors of the Irish economy have performed strongly in the first half of the year. These indicators are consistent with continued overall growth in the economy but the outlook is uncertain. The international economy has deteriorated and more adverse conditions could impinge on export growth. The effects of high inflation and uncertainty may not have fully passed through to domestic activity and could further dampen growth for the remainder of the year. 

With high inflation reducing the real disposable incomes of households, consumer spending is projected to grow at a slower pace than previously expected. The Central Bank’s Business Cycle Indicator signalled a slowdown in domestic economic activity in recent months, with overall retail sales flat on a monthly basis in April and May and declines in consumer sentiment. Combining these elements, forecast growth in consumer spending has been revised to 5.9% in 2022 and 4.4% in 2023. 

There are indications that supply-chain disruptions, high input prices and uncertainty are having an impact on investment. Survey evidence from firms indicates that high input costs of key materials as well as tight labour supply is expected to constrain growth in investment until 2024. In the construction sector, this is likely to manifest itself in a lower number of housing units completed even though planning permissions have been strong, with the forecast seeing completions rising to 31,000 in 2024. Modified investment is forecast to grow by 2.5% this year, 5.8% in 2023 and 5.6 % in 2024.

Tax revenue has grown strongly in 2022 and is likely to lead to a lower government deficit this year than envisaged in the October 2022 Budget. A General Government surplus is expected to emerge next year, rising to 2.0% of GNI* in 2024. Meanwhile General Government Debt is forecast to be 79.8% of GNI in 2024. Among other factors, projections for the public finances will be influenced by the extent to which temporary expenditure measures in 2022 are unwound over the forecast horizon and continued growth in government revenue. The volatility of corporation tax, its concentration among a small number of multinational firms and uncertainty over the impact of international reforms represent important downside risks to this revenue source over the medium term. 

The balance of risks to the central growth outlook is weighed to the downside. The baseline forecast is conditional on market expectations of the future price and supply of energy and other commodities. A more intense and protracted Russia-Ukraine war leading to higher energy prices and reduced supply would result in lower growth and higher inflation than outlined in the baseline forecast.

The costs of the negative, externally driven supply-side shock will be borne by the economy as a whole, with households and businesses facing a difficult adjustment.  Targeted policy measures can play a part in supporting those most affected by the current high inflation.  

Monetary policy actions will contribute to making sure high inflation does not become embedded over the medium term, and that households, businesses and the wider economy see the benefits of price stability.

In terms of domestic fiscal policy, choices on the overall tax and expenditure stance should aim to support necessary investment and supply-side conditions, avoid adding to medium-term inflationary pressures and vulnerability in the public finances, and maintain sufficient progress in addressing the green and demographic transitions over the coming period. 

Notes to Editor 

This Quarterly Bulletin also contains a Signed Article by Thomas Conefrey, Rónán Hickey, David Staunton and Graeme Walsh titled “Managing the Public Finances in Uncertain Times”.  This Article assesses the outlook for the public finances and considers a number of risk scenarios. The pandemic had a major impact on the government’s finances, resulting in a €27bn increase in government spending up to 2021. As the pandemic has abated, the public finances have recovered quickly. However, the war in Ukraine presents fresh challenges, with high inflation and expenditure pressures adding to existing demands on public finances. With large increases in capital spending already planned out to 2025, the analysis shows that additional permanent current spending funded by borrowing would add to inflationary pressures and slow down the public finance recovery. These effects would be mitigated if the spending was revenue-funded. Lower corporation tax revenue, higher interest rates and slower growth would result in the persistence of more elevated government debt over the medium term. In the current high-inflation environment, careful management of the public finances is required to ensure sustainable economic growth and to rebuild resilience in the government’s finances following successive negative shocks.