The Irish domestic economy could slip into technical recession in the coming quarters as households and business struggle against soaring inflation, according to Central Bank officials.
In its latest quarterly bulletin, the bank cut its 2023 forecast for modified domestic demand – a key gauge of the domestic economy – by almost half to 2.3 per cent as it raised its inflation outlook given financial markets are now pricing in an extended period of high gas prices. It also lowered its 2024 projection marginally, to 3.3 per cent.
While the bank does not publish quarterly figures, its acting director of economics and statistics, Robert Kelly, told reporters in response to questions that “there is the potential” that the domestic economy could slip into a technical recession, which is defined as two consecutive quarters of contraction.
“We are going into a period now towards late 2022 when we’ll see quite a considerable slowdown in the economy. That will continue into 2023,” he said, adding that the economy should pick up towards the second half of next year.
Business investment
The bank’s forecast that the domestic economy will grow by 6.4 per cent this year as a whole, some two percentage points more than previously predicted, is driven by an easing of Covid-19 restrictions earlier in the year and a surprise jump in business investment in the second quarter. That was down to a one-off spike in electrical machinery purchases – mainly related to the production of computer chips.
Irish inflation is expected to peak at 8 per cent this year before easing to 6.3 per cent next year and 2.8 per cent in 2024, the bank said.
“There remains upside risks to the inflation forecast and downside risk to the growth forecast,” it said. “Much of the slowdown in growth forecast in the second half of this year and early next year is contingent on currently high energy prices stabilising, alongside a smooth transition to more sustainable energy supply.”
A “more intense and protracted” war in Ukraine or “a less favourable growth path for the UK” would also affect forecasts, it warned.
Salary increases
While Irish workers are on track to see an average 3.8 per cent increase in salaries this year – driven by the information technology sector – the pace of inflation will result in pay per employee dropping at a real rate of 3.9 per cent, the Central Bank said. This would mark the first decline since the financial crisis more than a decade ago.
Still, the strong recovery in the labour market following the worst of the pandemic – with a record 2.55 million in employment as of the middle of this year, according to Central Statistics Office data – is likely to lead to ongoing wage growth in the coming years, according to the report.
Meanwhile, the Central Bank noted that over half of the €4.1 billion of temporary measures announced in Budget 2023 last week to support households and businesses through the energy shock “would appear to be untargeted and may run the risk of adding to medium-term inflation”.
Such measures include electricity credits for households, a double child benefit payment in November and extension of VAT and excise reductions on fuel, gas and electricity.
However, the bank concluded that the inflationary impact of the untargeted measures are “likely to be negligible in comparison to the other potential drivers of inflation, such as energy and its pass-through” to other goods and services.
