Central Bank of Ireland: See Weaker-Than-Expected 1Q But Overall Continued Strong Recovery

26 January 2022

By David Barwick – FRANKFURT (Econostream) – A short-term weakening of the Irish economy will not prevent generally strong growth over the medium term, according to the Central Bank of Ireland on Wednesday.

In its first quarterly bulletin of 2022, the central bank said that the Omicron variant of the coronavirus would depress activity this quarter, but not to the extent of previous pandemic waves, given the adaptation of economic actors and the positive effect of widespread vaccination. A recent loosening of containment measures would further limit the downside impact, the bulletin noted.

‘The strong recovery, which began in the second half of 2021, is expected to continue to gather pace during the first half of 2022 before slowing down in the latter half of the year into 2023 and 2024’, the bulletin said.

The Central Bank of Ireland sees Modified Domestic Demand up 7.1% this year, 5.2% in 2023 and 4.8% in 2024, under the assumption ‘that the effect of the pandemic on economic output will continue to diminish over the forecast horizon.’

Growth will be driven by personal consumption, which will benefit from higher disposable incomes, a return to normal levels of saving and the use of pandemic-related savings, the bulletin said.

‘On balance, risks to the growth forecast are marginally to the upside’, the central bank said. ‘The potential of a more rapid growth in consumption and investment amidst a tighter labour market outweighs that of other risks which could have more negative economic effects, such as more persistent Covid-related uncertainty or sector-specific challenges arising from Brexit.’

As for prices, the Central Bank of Ireland echoed its counterparts elsewhere in the euro area in predicting that the drivers of current elevated inflation rates would diminish in importance later in the year, but that inflation would remain generally higher than before the pandemic.

Irish HICP this year would measure 4.5%, followed by 2.4% in 2023 and 2.1% in 2024, according to the bulletin. Risks continue to be predominantly on the upside, it said.

‘The effects of Omicron and any further waves of Covid-19 that may occur increase the risk that supply bottlenecks persist longer than anticipated, adding to the costs of consumer goods and services’, the bulletin said. ‘Energy price developments also present an upside risk to inflation rates with geopolitical uncertainties particularly relevant at present.’

In the context of ongoing expansive monetary and fiscal policies despite the absence of slack in many sectors, higher demand could also boost prices, the Central Bank of Ireland said.

‘Differing international monetary responses could also put further pressure on prices through the exchange rate channel’, it continued. ‘Most importantly, while there is some evidence of wage pressures emerging, wage increases are not currently broadly-based, reflecting labour shortages and productivity increases in some sectors rather than generalised cost of living increases. The dynamics between wages and prices, nevertheless, could influence future inflation developments.’