The Central Bank has sharply lowered its forecast for growth in the domestic economy this year, mainly due to the effects of higher inflation, as well as the Russian invasion of Ukraine.

In its latest quarterly economic bulletin, the bank said that it expected modified domestic demand to grow by 4.8% this year, compared with 7.1% in its last bulletin.

Domestic growth forecasts for 2023 and 2024 have also been cut – to 4.3% and 3.9%, respectively. Overall, gross domestic product (GDP) is now expected to rise by 6.1% this year, compared with 8.7% forecast in the previous bulletin.

The bank now expects inflation to average 6.5% this year – a much higher rate than the 4.5% it expected in its last bulletin. It expects price pressures to ease next year, however, with a rate of 2.8%.

Exports affected

The bulletin said that wholesale energy prices were the main factor driving inflation at the moment, and that energy and food prices were also likely to rise “more substantially” over the coming months.

The bank warned that conflict in Ukraine would also reduce growth in Ireland’s trading partners. An increase in transport costs would also affect trade, it added, leading to a lowering of the forecast for export growth this year – from 9% previously to 8%.

The bulletin pointed out, however, that personal consumption would continue to grow, as household spending patterns returned to normal after the pandemic. The bank saw a strong rebound in spending in the first quarter, but higher inflation would be a drag on activity in the coming months.

It still expects growth of 7.4% in personal consumption this year, slowing to 4.7% in 2023.

Wage growth

The Central Bank also said that the labour market had recovered strongly, and that it now expected “stronger and broader-based" wage growth. It forecast an unemployment rate of 6% this year – down from 6.3% last year.

The bulletin said that the public finances were in a better position than it previously expected, and were “well positioned” to address the most immediate needs arising from the conflict in Ukraine.

The bank backed “temporary and targeted measures” to reduce the impact of higher inflation on those households less able to cope with the current circumstances.

“Momentum from the end of last year and into this year will see strong consumption growth for this year as a whole, but lower than previously expected, as households reduce spending in the face of real income declines and weaker confidence,” said Mark Cassidy (director of economics and statistics at the Central Bank).

“For businesses, higher costs for energy and materials, more uncertainty, and supply-chain disruptions will see weaker investment compared with our previous forecasts,” he added.