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Central Bank downgrades economic forecasts
Pic: RollingNews.ie

19 Dec 2023 / ireland Print

Central Bank downgrades economic forecasts

The Central Bank has forecast that the domestic economy will continue to grow this year, despite a drop in economic activity, as measured by GDP (gross domestic product).

In its latest quarterly bulletin, the bank also says that the Irish labour market has been “remarkably resilient”, while inflation has “declined significantly” over the course of this year.

The bulletin forecasts that GDP will fall by 1.3%, due to weaker exports in the technology and pharmaceutical sectors – including a sharp drop in exports that are produced abroad, but counted in Irish national accounts.

MDD to slow

The Central Bank warns that GDP does not provide a good indicator of economic conditions in Ireland, which are better measured by MDD (modified domestic demand) and employment.

It predicts that MDD growth will have slowed to 1.5% this year, though it will pick up to 2.5% next year. This year’s forecast represents a downgrade from the 2.9% the bank forecast in its last bulletin.

MDD is forecast to grow by 1.9% and 2% in 2025 and 2026, respectively.

The bulletin expects unemployment to rise only slightly to 4.8% next year, and remain below 5% out to 2026.

It adds that wage growth is picking up in response to tight labour market conditions, and in part to reverse real-wage declines experienced since 2021.

“The evidence suggests that, while overall real household income has returned to pre-COVID levels, that of lower-income households has not,” the bank says.

Inflation rate

The bulletin says that the effect of higher interest rates has become “more pronounced”.

The bank has urged the Government to focus on maintaining macro-financial stability over the next few years, and not take any policy actions that could be inflationary.

It expects an average inflation rate of 5.2% this year, slowing to 2.3% next year.

“The opportunity arises for achieving this aim, while at the same time delivering the necessary scale of investment to address critical needs in housing and related infrastructure, alongside that required to decarbonise the economy and mitigate the implications of climate change,” the regulator says.

Robert Kelly (director of economics and statistics) said: “The Irish economy has slowed into a phase of growth in line with its current medium-term potential. Inflation has fallen significantly during 2023, and the effects of the initial commodity-price shock have faded.

“As momentum in the domestic economic activity decreases, and the effects of tighter monetary policy continue to emerge, the process of disinflation is expected to proceed at a more gradual pace over the next two years,” he added.

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