Central Bank says Ireland’s domestic economy is rebounding

Ireland’s Central Bank has upgraded its forecasts for growth in the Irish economy as the country slowly reopens and more people receive Covid-19 vaccinations.

The Central Bank’s director of Economics and Statistics Mark Cassidy said that as the recovery takes hold domestic policy should increasingly focus on supporting people’s move into employment, ensuring resilience in the public finances, and addressing structural and longer-term challenges.

According to the Central Bank’s latest quarterly bulletin, the strict public health restrictions, in place from January until early-May, dampened economic activity in the first quarter of the year, as modified domestic demand contracted by 5pc in year-on-year terms.

“The progress of the vaccination programme, more positive consumer and business sentiment and supportive fiscal and monetary policy all bolster the outlook”

However, it said a strong rebound of the Irish economy is emerging. With an increasingly successful deployment of vaccines, and bolstered by continued support from monetary and fiscal policy, there is a widespread improvement of consumer and business sentiment. These factors lead to a more positive and somewhat less uncertain outlook than at the time of the previous Bulletin in April, with the forecasts for economic growth revised upwards.

The domestic economy

Modified domestic demand is now forecast to grow by 3.4pc in 2021 (from 2.8pc previously), 5.6pc in 2022 (from 3.9pc previously), and 4.8pc in 2023, bringing domestic activity back above pre-pandemic levels in 2022.

GDP figures in Q1 2021 highlight the difference between the externally focused and the domestic economy, with net exports of predominantly foreign-owned multinationals engaged in contract manufacturing driving headline growth of 11.8pc.

Supported by a strong export performance, GDP is projected to grow by 8.3pc in 2021 as a whole, 5.6pc in 2022 and 4.8pc in 2023.

The Central Bank reported that supply shortages and bottlenecks are evident across many sectors and raw material inputs, leading to higher inflation in many countries. However, these price pressures are expected to be transitory. Similar patterns are evident in Ireland, with a forecast of higher inflation this year and next of 1.8pc and 2pc, but easing back in 2023.

It said that the strengthening of economic activity over the coming months is expected to lead to lower levels of people receiving pandemic-related income supports.

A consistent pickup in employment will see the Covid-adjusted unemployment rate fall from 21.9pc in May 2021 to around 8pc by mid-2022, with the unemployment rate continuing to reduce to around 6.5pc by end-2023.

Employment is projected to reach pre-pandemic levels in the second half of 2023, amidst strengthening demand for labour. However, the past year has also witnessed lower levels of labour force participation and net inward migration. The extent to which these factors return will be an important driver of the shape and nature of the recovery and how it is experienced across the population.

Households in aggregate have accumulated excess savings since the onset of the pandemic, reflected in the sharp rise in deposits over the 12 months to May of €14.1bn. This compares with deposit growth of €6.7bn in 2019 and €4.5bn in 2018.

How households use any excess savings over the coming years will likely influence consumer demand, housing demand and individual financial investment decisions. With the expected strong rebound in consumption over the forecast horizon, the savings rate is anticipated to move below pre-pandemic levels in 2023, with the potential for a more rapid unwinding of excess savings boosting consumption and housing demand even further.

“While the possibility of a more protracted recovery in certain sectors cannot be discounted, the prospects for the economy as a whole appear to be more favourable, and risks to the growth outlook appear to be relatively balanced,” Cassidy recommended.

“The progress of the vaccination programme, more positive consumer and business sentiment and supportive fiscal and monetary policy all bolster the outlook. With domestic demand back above pre-pandemic levels next year, domestic policy should increasingly focus on supporting people’s move into employment, ensuring resilience in the public finances, and addressing structural and longer-term challenges in areas such as housing and climate change.”

By John Kennedy (john.kennedy3@boi.com)

Published: 1 July 2021

Recommended