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Central Bank lowers forecast for domestic economic growth

The Central Bank has revised downwards slightly its forecasts for growth in the domestic economy this year, but still expects that it will continue to grow at a moderate pace over the next three years.

The bank is now predicting that Modified Domestic Demand (MDD) will expand by 2.2% this year, down from its forecast in December of 2.5%, as weak global demand and domestic capacity constraints weigh on the pace of growth.

However, in its first Quarterly Bulletin for this year, the bank has maintained its previous predictions for the following two years, forecasting that MDD will grow by 1.9% in 2025 and 2% in 2026.

But despite the cut to the expected output from the domestic economy this year, the Central Bank has revised up slightly its expectations on the performance of the economy as measured by Gross Domestic Product (GDP) in 2024.

It now forecasts that GDP, which measures total economic activity including by multinational firms, will increase by 2.8% this year, up slightly from the 2.5% it estimated three months ago.

However, after that the bank thinks GDP will grow at a slightly slower rate than it had previously expected in 2025 and 2026, reflecting slower global growth and trade.

The Central Bank has also revised downwards modestly its expectations for inflation this year, saying the process of disinflation here has progressed faster than previously anticipated.

It is now predicting that the Harmonised Index of Consumer Prices will average out at 2% for 2024, before falling further to 1.8% the year after.

This, it says, reflects mostly external factors such as falling energy prices and the normalisation of supply chains.

However, it warns that domestic price pressures are now the dominant driver of inflation, particularly in services where the rate of price increase remains about 5% and is only expected to fall gradually between now and 2026.

Core inflation, which strips out energy and food prices, is likely to remain higher than headline inflation until 2026, it adds.

“Global headwinds and domestic capacity constraints are affecting the growth of the Irish economy,” said Robert Kelly, Director of Economics and Statistics.

“Disinflation has been significantly progressing and external price pressures have largely passed. However, domestic price developments – especially in the services sector – have been more persistent.”

“With moderate growth in the domestic economy anticipated out to 2026, increased focus remains on enhancing supply conditions to bolster resilience and support a sustainable growth in living standards.”

Employment remains resilient, the research also says, with the labour market continuing to run at full capacity and supply shortages in some sectors.

As a result, unemployment will remain at an average of 4.5% over the next three years, with wages expected to rise by 4.5%.

But it also cautions that momentum continues to slow and the pressures on supply versus demand seen in the labour market in recent times will ease, with employment growth falling as a result.

On housing, the bank forecasts completions will increase to 35,000 units this year and to 36,500 and 37,000 in 2025 and 2026 respectively.

“These forecasts are conditional on limited delays in the planning system and improved connection times to utilities,” it says.

It also points to signs of movement of labour and investment away from the commercial property sector towards residential.

The bank says overall that steady growth in the domestic economy has continued and will continue over the next three years at a moderate pace.

On the one hand it says household incomes and spending are recovering and residential construction output is rising, but on the other domestic investment remains muted.

Following a contraction in the output from the multinational sector last year, the bank says physical exports are recovering, led by the pharma sector.

But it also says that contract manufacturing, where Irish based multinationals outsource production to other countries has plateaued due to weaker global demand.

It warns that escalation of geopolitical tensions, more prolonged downturns in the pharma and tech manufacturing sectors, slower demand in major trading partners and domestic supply constraints all pose a risk to economic growth.

The bank says households continue to have large excess savings, but nevertheless growth in consumption is expected to moderate over the coming years amid constraints on wage growth.

In general terms it says several forces restraining economic growth are influencing the outlook out to 2026, including the transmission of changes to interest rates, developments in the pharmaceuticals and ICT sectors and capacity constraints in the domestic economy.

As a result, it says overall the risk to the growth outlook are tilted more to the downside.

The Central Bank also warns that “considered choices” are needed from the Government when it comes to domestic policy to ensure it supports macro-financial stability over the near to medium term.

“Maintaining an overall appropriate fiscal stance that does not unnecessarily aggravate any remaining imbalances between domestic demand and supply conditions can align with achieving near and longer-term priorities,” it says.

“Ensuring the economy has the capacity to absorb the necessary public and private investment in infrastructure to address the challenges of housing and climate change, and at the same time safeguarding fiscal sustainability requires more active consideration.”

Meanwhile, a separate piece of new research contained in the Quarterly Bulletin has found that the overall increase in the net wealth of Irish households over the past decade has been accompanied by a significant reduction in inequality.

The study found that the decrease was mainly driven by strong growth in the net wealth of households in the bottom half of the distribution.

However, it also found that despite the change the wealthiest 10% of Irish households are more than five times as rich as those in the poorer half of the distribution altogether.

“One reason for this is the considerable heterogeneity in the composition of households’ balance sheets and the increasing concentration of housing assets amongst richer households.”

“Over the past decade, while those in the bottom half of the net wealth distribution mainly benefited from a reduction of their liabilities, the richest 10 per cent of households witnessed an increase of their assets’ value.”


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