The Irish economy is expected to return to expansion mode this year, albeit at a more moderate pace than recent years, underpinned by the strong performance of the domestic economy and employment growth, AIB has said.
In its economic outlook report for May the bank said the normalisation of inflation was expected to continue over “the near term”. AIB chief economist David McNamara said the annual harmonised index of consumer prices is now forecast to fall to 2.2 per cent this year from 5.2 per cent, before remaining stable around the European Central Bank’s (ECB’s) target of 2 per cent in 2025 and 2026.
“Our latest forecasts point to continued growth in the Irish economy in the coming years,” Mr McNamara said. “However, this growth will be more moderate than the exceptional pace of recent years as the economy bounced back from the pandemic. The Irish economy continues to create jobs, and inflation has returned to normal ranges.”
Annual inflation in the Irish economy unexpectedly increased, the Central Statistics Office said on Thursday, from an estimated 1.6 per cent in April to 1.9 per cent in May. The latest estimates showed that prices rose by 0.5 per cent on monthly basis in May, driven by transport costs, including air fares, which rose by 1.5 per cent in the month and were up by 7.1 per cent in annual terms.
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Yet, with inflation cooling central banks are “on the cusp” of cutting interest rates, AIB said, with the ECB considered likely to begin the process at its next monetary policy meeting on Thursday of next week. This will support the economy in the near term, the report indicates, although there is “uncertainty on the trajectory of these cuts” and where rates will ultimately land over the coming years after the recent aggressive hiking cycle.
“While there is some disagreement as to where exactly long-term interest rates will land, they are likely to be higher than the ultra-low rates of the 2010s,” according to the report.
Meanwhile, headline economic growth in the Republic, as measured by GDP (gross domestic product) is expected to increase 2.6 per cent after dipping into contraction mode last year due to a downturn in the global pharmaceutical sector, the lender said.
Modified domestic demand, a growth metric for the domestic economy which attempts to strip out the distorting effect of the multinational sector, is also expected to grow by 2.4 per cent in 2025 and 2.6 per cent.
Employment gains are expected to underpin this performance, AIB said. It expects unemployment to remain close to the current low levels with employment topping a record 2.8 million people by 2026.
“This is as a result of strong population growth and the female participation rate surging since the pandemic, rising to 60.5 per cent of the working age population in first quarter of 2024 from 56.4 per cent in the fourth quarter of 2019,” it said.
Flexible working arrangements introduced during the pandemic may have driven this increase in the participation rate for women, “however, there are signs this exceptional growth will cool as the labour market nears full capacity”, the report noted.
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