€16bn worth of pent-up Covid savings will drive consumer spending, but rising inflation could threaten living standards, warns Central Bank.
As many as 160,000 additional jobs could be generated in Ireland over the next two years, the Central Bank has predicted, resulting in a reduction in the unemployment rate to below 6pc by 2023.
According to the Central Bank’s latest Quarterly Bulletin, growth of 5.5pc is predicted this year, compared with -4.9pc in 2020 and which is double the previous forecast, and 7.1pc next year and 4.1pc in 2023.
“This momentum contributes to an increasingly positive outlook for the economy out to 2023, with domestic activity back to pre-pandemic levels by end-2021”
This is linked to a rapid resurgence in consumer spending linked to the €16bn of excess savings built up during the pandemic.
However, “careful management” of the public finance is necessary to prevent rises in inflation eating into living standards.
Inflation is forecast to go from -0.5pc in 2020 to 2.1pc in 2021, 2.9pc in 2022 before settling to 1.9pc in 2023.
“As the easing of public health restrictions continues, the rebound in the Irish economy in recent months is expected to be followed by a sustained period of robust growth.
“Against a broadly favourable international backdrop, domestic consumption, investment and employment are currently growing at a pace at or above what was expected at the time of the last Bulletin.
“This momentum contributes to an increasingly positive outlook for the economy out to 2023, with domestic activity back to pre-pandemic levels by end-2021, albeit that uncertainty remains high.
“The combination of a surge in demand, supply bottlenecks and some constraints in the labour market is leading to higher consumer and broader price pressures.
“While the main drivers of the higher inflation outlook are considered temporary, promoting sustainable growth in Irish living standards requires careful management of domestic economic policy as it moves away from a focus on pandemic-related measures,” the Central Bank recommended.
The Central Bank pointed to the recent Quarterly National Accounts (Q2 2021) published by the CSO which confirmed the extent to which the economy bounced back in recent months.
“The pick-up in consumer spending and domestic investment has been in-line with, or slightly stronger than anticipated. However, the recent domestic demand performance was always going to be flattered in comparisons with periods during which stringent public health restrictions were in place.
“More surprising has been the net export performance that has persisted so far in 2021. This has been largely due to the activities of multinational enterprises, in particular exports in the ICT and pharmaceuticals sectors.”