Central Bank of Ireland: Near- to Medium-Term Economic Outlook Improved

1 July 2021

By David Barwick – FRANKFURT (Econostream) – Prospects for the Irish economy have improved and risks to growth are balanced, the Central Bank of Ireland said Thursday.

In its third quarterly bulletin of 2021, the central bank cited vaccination progress, improved consumer and business sentiment and policy support as factors behind a brighter outlook for Ireland.

‘With the relaxation of public health restrictions, high frequency indicators suggest a strong rebound in activity’, the bulletin said. ‘The downside risk of a slower recovery if public health restrictions had to be tightened again remains, but is lower relative to the previous bulletin. Overall, risks to the growth outlook appear to be relatively balanced.’

With the US fiscal stimulus expected to add almost one percentage point to Irish growth by 2022, the central bank projected output to expand by 8.3% this year, 5.4% next year and 4.8% in 2023, substantially more than the 5.9% for 2021 and the 4.7% for 2022 forecast three months ago.

In the context of higher growth, ‘supply shortages and bottlenecks arise in the short term, thus contributing to the forecast of higher inflation’, according to the bulletin. ‘HICP inflation projections of 1.8% this year and 2% in 2022 reflects relatively transient price pressures that are expected to ease, with HICP inflation of 1.7% projected in 2023.’

That compares to a mere 0.8% for both 2021 and 2022 foreseen three months ago. The central bank coupled the revised projections with a mildly cautionary note:

‘This path depends on the near-term transitory price pressures related to supply bottlenecks not becoming persistent and embedded in excessive price expectations’, it said, calling for policy to ‘shift from limiting the effects of the near-term shock to minimising supply constraints arising from labour market mismatches over the medium term.’

The measures it proposed in this context would ‘promote a more balanced recovery, reduce the possibility of wage and price pressures becoming more persistent, and contribute to the economy’s long-term productive capacity’, it said.

Ireland’s sovereign debt would come in at 108% of gross national income this year and 106% next, according to the bulletin. ‘The fiscal response has been complemented by the monetary policy stance of the ECB, designed to preserve favourable financing conditions and to bring medium-term inflation back towards its aim of below, but close to, 2%’, it said. ‘Consequently, borrowing costs have been contained despite the additional pandemic-related debt.’

With the waning of the pandemic-related crisis, the central bank called on the government to come up with ‘a credible plan … to reduce the public debt ratio over time to a more sustainable level, ensuring long-term resilience and the capacity to respond to future shocks.’

Positive economic prospects should help with this, it said, though structural imbalances between revenue and expenditure could hamper the effort.