A post-Covid growth surge in the Irish economy is expected to generate 160,000 additional jobs over the next two years, reducing the unemployment rate to below 6 per cent, the Central Bank has said.
In its latest quarterly bulletin the regulator predicted turbo-charged growth of 15.3 per cent this year, nearly double its previous forecast in July, and 7.2 per cent next year on the back of a rapid resurgence in consumer spending linked to the unwinding of €16 billion in excess savings built up during the pandemic.
However, it warned that businesses and households are facing higher costs and prices due to pent-up demand and supply bottlenecks. These factors are leading to higher transport, energy and input costs across the economy, as well as demands for higher wages to compensate for the increased cost of living.
It predicted average earnings would rise by 5.1 per cent this year, fuelled by labour shortages in several sectors, most notably construction.
“As the easing of public health restrictions continues the rebound in the Irish economy in recent months is expected to be followed by a sustained period of robust growth,” the Central Bank said.
“Domestic consumption, investment and employment are currently growing at a pace at or above what was expected at the time of the last bulletin,” it said.
It expected domestic economic activity to be back to pre-pandemic levels this year, and back to where it would have been in the absence of the pandemic by the end of 2023.
It predicted the recovering economy would create 160,000 new jobs over the forecast period out to 2023, reducing the jobless rate to 5.9 per cent. The Covid-adjusted unemployment rate currently stands at 12.4 per cent.
Some sectors would take longer to recover to their pre-Covid levels of employment, leading to “some persistence” in the unemployment rate as workers either find work in other sectors or wait for their sector to regain full capacity, it said.
One of the consequences of the current surge in demand was "a resurgence in global inflationary pressures", the Central Bank's director of economics and statistics Mark Cassidy said. He predicted the upward pressure on prices would peak at close to 4 per cent by the end of this year, before easing next year.
In its report the Central Bank also warned that pandemic-related spending, as well as the Government’s planned fiscal expansion in other areas, posed a risk to the public finances.
While not directly criticising the Government’s budgetary strategy, which includes greater spending and bigger budget deficits out to 2025, Mr Cassidy said that “by putting more money into the economy than you’re taking out – which is what a budget deficit does – you are increasing demand pressures at a time when the economy is getting back towards capacity at a faster rate than we thought”.
He said necessary infrastructure investment had to be carefully managed and supported by wider policy initiatives so that the challenges in housing and in climate action could be addressed without unnecessarily adding to inflationary pressures, labour shortages or “crowding out private sector investment”.
On whether changes to Ireland’s 12.5 per cent corporation tax rate might result in a bigger hit to the public finances than the €2 billion being forecast by the Government, Mr Cassidy said “once we see the terms of any agreement which, of course, is still under discussion, we’ll be in a better position to estimate whether the effects might be somewhat more or somewhat less”.
A Cabinet meeting on Thursday will examine revised OECD proposals for a new global minimum rate of 15 per cent amid reports the Government has agreed in principle to the draft deal.