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Central Bank predicts economy will shrink this year

The Central Bank has become the latest economic forecaster to predict that the economy will shrink this year.

Its latest Quarterly Bulletin also shows that lower income families have seen their real incomes decline over the past two years due to inflation while higher income groups have seen a faster recovery.

Multinational companies exporting pharmaceutical products made here have seen exports fall this year following years of exceptional growth during the pandemic.

Also, so-called 'contract manufacturing' where goods are made abroad for multinationals located here but counted as Irish exports have fallen by 50%.

That all means that the economy measured by GDP is expected to shrink this year by 1.3%, according to the Central Bank.

Growth in the domestic economy has been downgraded too.

The economy is now set on a lower growth path because global trading conditions have worsened.

However, the Bank expects employment levels to remain high.

It notes that the real incomes of lower income groups have been worse affected by inflation while upper income groups have seen higher wages compensate more for price rises.

It suggests that further targeted cost-of-living supports could have done more to prevent lower income groups faring worse in the past two years.

The Central Bank’s forecast for GDP growth this year is -1.3% while Modified Domestic Demand, which captures activity in the domestic economy, has been downgraded to 1.5%. Both measures are expected to increase by 2.5% next year.

Inflation, measured by the Harmonised Index of Consumer Prices (HICP) is expected to average 5.2% this year and 2.3% next year, lower than the Bank’s September forecast.


Meanwhile, core HICP inflation which excludes food and energy, is expected to be 4.4% this year and 2.9% next year.

The Bank considers the biggest downside risk to the economy to be global demand which fell more than was originally forecast this year.

On inflation and monetary policy, the Bank says it is too early to "declare victory on inflation" and says it will be watching wage bargaining closely in the first months of next year.

The Bank’s Director of Economics and Statistics, Robert Kelly, said it would have been better for the Government to stick within the 5% spending rule in the Budget.

He also said in the absence of other rules around fiscal policy that can be applied to Ireland, it is important for budgetary credibility to stick to the rules which have been set.

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