Quarterly Bulletin 2021:3 – widespread improvement of consumer and business sentiment bolster economic outlook

• Modified domestic demand is forecast to grow by 3.4% in 2021, 5.6% in 2022 and 4.8% in 2023
• Since the last QB, the prospects for the economy as a whole appear to be more favourable, and risks to the growth outlook appear to be relatively balanced
• As the recovery takes hold domestic policy should increasingly focus on supporting people’s move into employment, ensuring resilience in the public finances, and addressing structural and longer-term challenges

The Central Bank has today (1 July 2021) published the third Quarterly Bulletin of 2021.

Speaking on the release, Mark Cassidy, Director of Economics and Statistics said “As the COVID-19 restrictions have relaxed, we are seeing that domestic economic activity is rebounding. While the possibility of a more protracted recovery in certain sectors cannot be discounted, the prospects for the economy as a whole appear to be more favourable, and risks to the growth outlook appear to be relatively balanced. The progress of the vaccination programme, more positive consumer and business sentiment and supportive fiscal and monetary policy all bolster the outlook. With domestic demand back above pre-pandemic levels next year, domestic 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 strict public health restrictions, in place from January until early-May, dampened economic activity in the first quarter of the year, as modified domestic demand contracted by 5% in year-on-year terms. However, a strong rebound of the Irish economy is emerging. With an increasingly successful deployment of vaccines, and bolstered by continued support from monetary and fiscal policy, there is a widespread improvement of consumer and business sentiment. These factors lead to a more positive and somewhat less uncertain outlook than at the time of the previous Bulletin in April, with the forecasts for economic growth revised upwards. Modified domestic demand is now forecast to grow by 3.4% in 2021 (from 2.8% previously), 5.6% in 2022 (from 3.9% previously), and 4.8% in 2023, bringing domestic activity back above pre-pandemic levels in 2022.

GDP figures in Q1 2021 highlight the difference between the externally focussed and the domestic economy, with net exports of predominantly foreign-owned multinationals engaged in contract manufacturing driving headline growth of 11.8%. Supported by a strong export performance, GDP is projected to grow by 8.3% in 2021 as a whole, 5.6% in 2022 and 4.8% in 2023.

Supply shortages and bottlenecks are evident across many sectors and raw material inputs, leading to higher inflation in many countries. However, these price pressures are expected to be transitory. Similar patterns are evident in Ireland, with a forecast of higher inflation this year and next of 1.8% and 2%, but easing back in 2023.

The strengthening of economic activity over the coming months is expected to lead to lower levels of people receiving pandemic-related income supports. A consistent pickup in employment will see the COVID-adjusted unemployment rate fall from 21.9% in May 2021 to around 8% by mid-2022, with the unemployment rate continuing to reduce to around 6.5% by end-2023. Employment is projected to reach pre-pandemic levels in the second half of 2023, amidst strengthening demand for labour. However, the past year has also witnessed lower levels of labour force participation and net inward migration. The extent to which these factors return will be an important driver of the shape and nature of the recovery and how it is experienced across the population.

Households in aggregate have accumulated excess savings since the onset of the pandemic, reflected in the sharp rise in deposits over the 12 months to May of €14.1bn. This compares with deposit growth of €6.7bn in 2019 and €4.5bn in 2018. How households use any excess savings over the coming years will likely influence consumer demand, housing demand and individual financial investment decisions. With the expected strong rebound in consumption over the forecast horizon, the savings rate is anticipated to move below pre-pandemic levels in 2023, with the potential for a more rapid unwinding of excess savings boosting consumption and housing demand even further.

The pandemic prompted an exceptional fiscal, monetary and macroprudential policy response domestically and internationally. These responses have been proportionate and warranted. However, different challenges emerge as trading conditions normalise, and government supports are removed. The viability of individual businesses and jobs will become clearer, as we see changes in consumer and investor preferences and behaviour, alternative work, supply chain and migration patterns, increased digitalisation, and ongoing adjustment to the new trading arrangements between the EU and the UK. Policy should shift to minimising supply constraints arising from labour market mismatches over the medium term, facilitating moves out of longer-term unemployment and inactivity into employment in sectors with high labour demand.

A credible path toward a lower public debt ratio is required, building necessary resilience and capacity to respond to future shocks. In doing so, it is necessary to account for risks to tax revenues, known expenditure pressures, and create space for investment to tackle infrastructure deficits in housing and in achieving climate change targets without adding to excessive inflationary pressures in the medium-to-longer term. With potentially strong demand on government resources, it is reasonable to consider the need for additional revenue-raising measures or reducing other areas of spending.