Economy set for surge as households to splash €12bn savings

Central Bank upgrades growth forecast while warning on public finances

The Central Bank’s director of economics and statistics Mark Cassidy said household deposits – a proxy for savings – had increased by €21 billion over the past 18 months. Photograph: James Forde/The Irish Times

The Central Bank’s director of economics and statistics Mark Cassidy said household deposits – a proxy for savings – had increased by €21 billion over the past 18 months. Photograph: James Forde/The Irish Times

Your Web Browser may be out of date. If you are using Internet Explorer 9, 10 or 11 our Audio player will not work properly.
For a better experience use Google Chrome, Firefox or Microsoft Edge.

 

The Central Bank is forecasting a surge in economic growth later this year as households unleash up to €12 billion in “excess savings” built up during the pandemic.

However, it warned that as the pandemic eased, a credible plan was needed to get the public finances back on track and that the Government may need to consider “revenue-raising measures” to address its future spending needs.

In its latest quarterly commentary, the regulator upgraded its growth forecast for the economy to 8.2 per cent, nearly double the Government’s projection, noting the vaccine rollout “was proceeding at pace and therefore a faster recovery is now expected”.

It said the Government’s decision to delay the reopening of indoor hospitality by several weeks had not impacted its forecasts.

High-frequency indicators such as card spending pointed to a pick-up in private consumption in recent weeks as the economy reopens, it said.

This will be supported by the unwinding of what it called “forced” or “precautionary” savings arising from people’s inability to spend or from uncertainty about the economic outlook.

The Central Bank’s director of economics and statistics Mark Cassidy said household deposits – a proxy for savings – had increased by €21 billion over the past 18 months.

He estimated that €9-€12 billion of this was “forced or precautionary” and would flow back out into the economy in the form of additional spending in the near to medium term. Some of it is expected to be spent in housing, potentially fuelling further house price growth.

Mr Cassidy said the level of savings accumulated has been unprecedented and the extent and speed at which they are unwound will have significant implications for the economy.

In its report, the Central Bank considers two savings scenarios; one in which the savings are unwound at speed, leading to a rapid acceleration in consumption and a faster recovery, and a second scenario involving a slower unwinding, resulting in a slower recovery.

“Depending on the capacity of the economy to absorb the extra levels of consumption generated by the unwinding of savings in a short time frame, more expenditure could generate additional employment and thus extra income,” it said.

Budget deficit to increase

In its report, the regulator predicted the Government’s budget deficit would increase to €21.5 billion this year, up from €19 billion last year, as a result of spending on wage supports and other pandemic measures.

“ The necessary fiscal expansion has led to a deterioration in the public finances, with risks to the revenue base and higher core expenditure becoming more prominent,” it said.

The Government may need to consider additional revenue-raising measures or cuts in spending in the medium term to address spending pressures related to an ageing population; the need to invest in critical infrastructure such as housing; and the fall-off in corporate tax revenue, it said.

Sustainable funding of current expenditure created space for public investment, it said.

In its analysis, the Central Bank said exports from of pharmaceutical and IT products will drive growth this year and next, the Central Bank said, while warning that exports from the sectors dominated by domestic firms would recover at a slower pace with the agri-food sector also likely to be affected by Brexit.

Even after the economy was fully reopened, unemployment would remain elevated at 7 per cent this year and next and would not return to pre-pandemic levels until 2024.

Business Today

Get the latest business news and commentarySIGN UP HERE