The Central Bank has raised its forecasts for economic growth this year, saying that the outlook for the economy is now more favourable than was the case earlier in the year.
The bank has also told the Government it should look at raising taxes or reducing spending in some areas, to finance the potentially strong demand on resources to tackle issues such as housing and climate change.
Uncertainty on tax reform
The bank’s latest quarterly bulletin adds that pressure for spending in some areas, as well as the potential impact of international tax reform on corporation tax receipts, makes the outlook for the public finances more uncertain than usual.
The bulletin says that demand in the domestic economy should be back above pre-pandemic levels next year.
It now expects modified domestic demand to grow by 3.4% this year – up from its 2.8% forecast in April. The forecast for 2022 has also been raised sharply – from 3.9% to 5.6%.
High levels of excess savings
The Central Bank says consumer spending and demand for housing could rise at an even faster rate over the next couple of years, depending on how households use the high level of excess savings they have built up through the pandemic.
The bank now sees gross domestic product (GDP) growing by 8.3% this year, compared with 5.9% in its last bulletin, mainly due to strong growth in exports from the multinational sector.
“The progress of the vaccination programme, more positive consumer and business sentiment, and supportive fiscal and monetary policy all bolster the outlook,” said Mark Cassidy (Director of Economics and Statistics, pictured).
Policy recommendations
He said that Government policy should increasingly focus on supporting people’s move into employment, ensuring resilience in the public finances, and addressing structural and longer-term challenges in areas such as housing and climate change.
The bulletin warns that, while the unemployment rate should fall to around 8% by mid-2022, employment will not reach pre-pandemic levels until the second half of 2023. It adds that the past year has seen reduced levels of labour-force participation, and lower net inward migration.
As structural changes take effect in many areas of the economy, the Central Bank urges the Government to focus on measures to help people to move out of longer-term unemployment and inactivity, and into employment in sectors with high demand for labour.
The bank says that, even with an expected rebound in construction, the delivery of new housing will continue to be below estimates of long-run demand, putting further upward pressure on rents and house prices.