Irish workers in line for biggest pay hike since crash

Irish workers are in line for their biggest pay rise in a decade, with salaries expected to grow by nearly 7 per cent on average over the next two years, according to the Central Bank of Ireland.

In its latest quarterly bulletin the bank said wages were expected to rise by 3.3 per cent in 2018 and 2019, twice the current euro-zone rate, on the back of strong economic growth and a further tightening of the labour market.

The increases would be more pronounced in sectors facing a shortage of skilled workers, among them professional and scientific services, which include accounting and law firms; financial services; and information and communications, which include the State’s large IT industry. These sectors would be forced to pay more to attract or retain staff.

In contrast, the bank said, pay rises would be more modest for workers in retail, accommodation and food services.

House prices forecast to rise by 10% in 2018

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Although headline inflation remains relatively subdued, this level wage growth would support household incomes via higher real wages, which in turn would further strengthen domestic demand, the Central Bank said.

“Broadly sustainable” wage growth

John Flynn, its head of Irish economic analysis, said a notable feature of the recent acceleration in employment was the growth in full-time work, which was pushing up average hours worked across the economy and providing an additional boost to earnings.

Mr Flynn also noted that the recovery in consumer spending was closely tracking the rise in nominal incomes, suggesting it was being driven by the improvement in the labour market, in contrast to previous periods, when growth was driven by rising credit or asset prices.

Mark Cassidy, the Central Bank's director of economics and statistics, said wage growth of 3.3 per cent was broadly sustainable given growth elsewhere in the economy, but any rises in that rate would increase the prospect of overheating.

The bank upgraded its headline growth forecast for the economy for this year to 4.8 per cent, reflecting the continued strength in domestic demand “and a broadly improving international growth environment”.

Record employment in 2019

The unemployment rate was projected to average 5.6 per cent this year, declining to 4.8 per cent in 2019. Total employment is expected to reach a record 2.3 million next year, surpassing its precrash peak.

But the bank warned of significant challenges. "Potential risks include a disruptive UK exit from the European Union next year, an increase in protectionist trade policies, changes to international tax regimes that can have an impact on foreign direct investment by multinational firms, and disruptive movements in bilateral exchange rates."

On the housing crisis, it predicted property prices would continue to rise until supply came in line with demand. It declined to predict when this would happen, noting only that most reliable indicators pointed to a significant pick-up in home-building.

On Thursday morning, Mr Cassidy played down concerns of a new housing price bubble.

"We are not seeing the same kind of house price credit bubble that we saw a decade and more ago," he told RTE's Morning Ireland. "At the moment, credit conditions are still quite weak overall, and by this I mean while new mortgage lending is increasing quite rapidly, this is from a very low base, and in fact, the amount of outstanding credit in the economy is only increasing by the order of around 1 per cent a year."

Mr Cassidy said the Central Bank "would always be watchful" of excessive increases in house prices or house price valuations "that are above where we would expect them to be", and which would be flagged up in its annual assessments.