Quarterly Bulletin 2022:2 - economic growth set to continue, but slower than previously forecast, higher inflation expected in the short term.

• Growth in modified domestic demand growth is still expected in the coming years, but forecast has been revised down to 4.8% in 2022, 4.3% in 2023 and 3.9% in 2024
• Consumer price inflation is expected to average 6.5% this year, the result of particularly strong energy price inflation, moderating to 2.8% in 2023 and 2.1% in 2024
• The Russian invasion of Ukraine has sparked a chain of events that have increased uncertainty and presented challenges to the outlook for inflation and growth

The Central Bank has today (6 April 2022) published its second Quarterly Bulletin of 2022 (PDF 2.35MB).

On the launch of the Quarterly Bulletin, Mark Cassidy, Director of Economics and Statistics said:

“Momentum from the end of last year and into this year will see strong consumption growth for this year as a whole, but lower than previously expected as households reduce spending in the face of real income declines and weaker confidence. For businesses, higher costs for energy and materials, more uncertainty, and supply chain disruptions will see weaker investment compared with our previous forecasts. While the Russian invasion of Ukraine is first and foremost a humanitarian tragedy for the Ukrainian people, the economic consequences of the war are being felt across Europe. Higher inflation as well as greater uncertainty represent headwinds to economic growth. As a small, open economy, that is dependent on imported energy and fuel, Ireland is not immune to these developments. We are revising upwards our forecasts for inflation for the coming years and our forecasts for growth, while still favourable, are revised downwards. ”

The economy began 2022 with strong growth momentum but the economic effects of the Russian invasion of Ukraine will weigh on growth. As a result, modified domestic demand growth has been revised down to 4.8% in 2022, 4.3% in 2023 and 3.9% in 2024.

The conflict will also reduce growth in Ireland’s trading partners and, while Ireland’s direct trade links with Ukraine and Russia are small, there will be an impact on demand in our main trading partners and an increase in transport costs. Exports are forecast to grow by 8.0% in 2022, 6.2% in 2023 and 6.0% in 2024.

Consumer price inflation is expected to average 6.5% this year, with wholesale energy prices the primary factor driving inflation at present. Energy and food prices are also likely to rise more substantially over the coming months. Financial markets are expecting energy prices to decline in the second half of the year but will remain above 2021 levels over the course of our forecast horizon. Due to these assumptions, inflation is forecast to slow to 2.8% in 2023 and 2.1% in 2024, however this is highly dependent on the fallout from the war in Ukraine.

Personal consumption will continue to grow as household spending patterns normalise post the pandemic, but the reduction in real incomes from higher inflation will be a drag on spending in the coming quarters. High frequency indicators show that the first quarter saw a strong rebound in spending and activity as restrictions eased. Over the forecast horizon, consumption is forecast to grow by 7.4% this year, slowing to 4.7% and 3.9% in 2023 and 2024, respectively.

The adjustment of the labour market through the pandemic has been testament to the strength of the recovery, with numbers employed now exceeding 2019 levels and the standard unemployment rate at around 5.0%. Despite the challenging conditions, a tightening labour market is expected, with stronger and broader-based wage growth. This will be welcomed as real incomes will likely fall this year. However, where growth in wages or profits respond entirely to the currently high rates of inflation, or are detached from underlying productivity growth, the likelihood increases that harmful higher inflation becomes embedded.

The increase in uncertainty and disruption to supply chains will constrain investment growth this year and next. While planning permissions and commencements indicate a strong pickup in construction this year, higher materials costs and labour shortages are forecast to constrain growth in the sector more so than previously expected. Despite the conflict in Ukraine, as well as lockdowns in China in the first quarter, which will act to exacerbate strains on global supply chains, modified investment is forecast to grow by 4.0% this year, 6.9% and 7.0% in 2023 and 2024.

Both the deficit and debt position of the Government started 2022 in a better position than previously expected, with further improvement expected over the forecast horizon. A General Government surplus is expected to emerge next year, rising to 1.9% of GNI* in 2024. Meanwhile General Government Debt is forecast to be 84.7% of GNI* in 2024.
With the economy and labour market performing well over recent months, the public finances are well positioned to address the most immediate needs arising from the conflict in Ukraine, including the necessary humanitarian response for those displaced by the war. Temporary and targeted measures to reduce the impact of higher inflation on those households less able to cope with current circumstances are appropriate.

However, sustainably achieving both pre-existing and newly emerging priorities as a result of the war will require choices to be made and careful management of the public finances over the medium term.

ENDS

Notes to Editor

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