THE GOVERNMENT NEEDS to think about balancing future spending increases with additional ways of revenue-raising as the Irish economy recovers from the pandemic, the Central Bank of Ireland has said.

Published this morning, the Central Bank’s latest Quarterly Economic Bulletin suggests the economy has already shaken off much of the immediate impact of the Covid-19 crisis.

Buoyed by a consumer spending boom and strong export performance, it now expects headline growth — as measured by Gross Domestic Product (GDP) — to jump by 15.3% this year, up from 8.4% in the Central Bank’s last bulletin, published in July.

At the current pace, domestic economic activity is projected to return to pre-pandemic levels by the end of 2021, according to the Central Bank’s latest set of forecasts.

By the end of 2022, the overall economy is now expected to have returned to its pre-Covid path.

Mark Cassidy, Director of Economics and Statistics at the Central Bank, cautioned that GDP “overstates” the rate of growth for the Irish economy.

But modified domestic demand — “a more meaningful indicator of our underlying economic performance”, Cassidy said, aimed at stripping out the influence of multinationals — is also projected to expand by 5.5% this year, up from 3.4% in the latest bulletin.

Rising price inflation — triggered by rapidly improving consumer demand, rising energy costs and global supply chain and transport crisis — is expected to moderate next year although the outlook remains uncertain, the Central Bank warned.

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However, a stronger rebound in household spending, more persistent supply disruptions, or a slower labour supply response could result in higher inflation than currently anticipated.  Promoting sustainable growth in Irish living standards requires careful management of domestic economic policy as it moves away from a focus on pandemic-related measures. 

Speaking to reporters, Cassidy said that if the Government continues to increase spend without raising additional revenue, the economy could potentially overheat.

“If we’re running current budget deficits, then you’re adding to demand in the economy, and you’re increasing the risk of overheating — you’re increasing the risk that additional money will pass through to higher prices and costs, rather than increasing the volume of output,” he said.

“So what we will be saying is that any increases in core expenditure that the government decides upon, we need to think about how they will be financed through increasing revenue sources.”

Unemployment picture

Unemployment — which has declined throughout 2021 as businesses and workplaces reopened — is forecast to fall from a Covid-adjusted rate of almost 17% of the total labour force in 2021 to a standard rate of 7.2% in 2022, according to the Central Bank.

But the jobless rate is now expected to be 5.9% by the end of 2023, “still somewhat above the pre-Covid level, which was just below 5%”, said Cassidy.

“Certainly the outlook has improved,” he added.

“The average unemployment rate in 2023, for example, we are forecasting at around 152,000, which is only around 30,000 more unemployed, compared to the pre-pandemic situation.”

The Covid-adjusted measure takes into account the number of people on the standard Live Register as well as those on the Pandemic Unemployment Payment (PUP). But PUP is due to be wound down early next year at which point the two measures of joblessness will converge.

Labour pains

Although not nearly as acute as the situation in the UK — where heavy goods vehicle drivers, many of them Eastern European, have returned to their home countries as a result of Brexit — some experts warned last week that Ireland could face similar issues due to long-flagged skills shortage in the transport sector.

“The unfortunate thing is it’s an EU-wide issue, so we’re fighting for the same people,” Aidan Flynn, General Manager of the Freight Transport Association, told The Journal last week.

The Central Bank said worker shortages in certain sectors like transport and hospitality could be the result of “short-term friction” caused by many employers looking to rehire at once.

However, it noted that the driver shortage pre-dates the Covid crisis and could persist as a result of lower migration in the wake of the pandemic.

Overall wages have grown by about 5% in the first half of 2021, the Central Bank said, falling to 3.5% next year.

But Cassidy said the wage growth is not expected to be “uniform” across the economy and has so far been confined to certain sectors of the economy like finance, IT and professional services. 

He said, “For other parts of the economy — particularly those parts of the services sector that were forced to close down like restaurants, bars, hospitality — wage increases are still much more subdued.”

However, he said wages in those sectors are expected to pick up as overall demand improves.