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Lower growth next year but no recession – Central Bank

The Central Bank has reduced its forecasts for growth in the domestic economy next year and raised its outlook for inflation.

However, its latest Quarterly Bulletin says the economy will not fall into recession and it expects the labour market to remain strong.

Inflation has become more widespread and energy prices will be higher for longer. But the costs of this shock to the economy “are largely unavoidable”, according to the Central Bank.

It expects household incomes to fall this year due to inflation but the continuing strength in the jobs market leads the bank to expect a “pronounced pickup in wages” next year.

The Central Bank says just over half of the measures in last week’s budget appear to be “untargeted” and could add to inflation.

However, it believes whatever potential there is for this is small compared to the effect of higher energy prices.

The bank also says some of the general supports which go to all income groups could end up being saved, which would not add to inflation, as consumers are worried about the future.

A report in the bank’s bulletin finds that 180,000 households have difficulty in making ends meet and have less than €500 of savings.

It warns that if energy and food prices were to continue to rise further, this group would need more support.

The bank forecasts that growth, as measured by both GDP (which includes the impact of multinationals) and Modified Domestic Demand (which attempts to strip out the impact of multinationals) will be higher this year than previously forecast due largely to some once-off investment decisions.

These include expenditure on computer equipment as many workers prepared to work from home.

There were also some significant once-off investment decisions by multinationals, which have had a positive effect on the national accounts.

However, next year, growth in the domestic economy is expected to be 2.3%, which is 2% lower than the bank’s summer forecast.

Inflation is also forecast to average out at 6.3% next year, which is 2% higher than previously forecast.

The bank adds that forecasts on inflation are extremely uncertain and much depends on what happens to gas prices.

The labour market is expected to remain strong with the current vacancy rate showing just three workers available for every job advertised. In 2019, pre-Covid, this rate was six workers to every available job.

As a result, it expects unemployment, which it forecasts to be 4.7% this year, will only rise to 5.1% next year.

The bank expects that most companies will do their best to hold on to workers, despite increases in costs and an expected slowdown in consumer spending.

Article Source: Lower growth next year but no recession – Central Bank – Robert Shortt – RTE

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