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Central Bank lowers growth forecast for domestic economy

The Central Bank has reduced its forecasts for economic growth this year.

In its latest Quarterly Bulletin, the bank predicts that Modified Domestic Demand will expand by 2.1% in 2024, down from its forecast in March of 2.2%.

It has also cut its forecast for Gross Domestic Product to 1.8%, down from its previous projection of 2.8%.

The bank has revised upwards its projection for growth next year, forecasting that MMD will increase by 2.5% in 2025 up from its previous forecast of 1.9%.

It has left its projection for 2026 unchanged at 2%.

In its outlook, the Central Bank warned that escalating geopolitical tensions could impact supply chains.

Inflation

On inflation, the Central Bank said that energy, food and non-energy industrial goods prices, which are determined more by global market conditions, are projected either to rise at a much more moderate pace or to decline.

As a result, it is forecasting that both headline and core measures of inflation are likely to ease toward and hover around 2% this year and next.

It is also highlighting that the outlook for consumer spending is sensitive to potential changes in household savings behaviour, with the pick-up in consumption appearing to be weak relative to the rise in incomes.

Public finances

When it comes to the public finances, the Central Bank said that it would not be appropriate to continue with an expansionary fiscal stance and that a continuation of spending increases without compensating tax measures could contribute to overheating risks.

“Such a scenario would lead to higher inflation, damaging Ireland’s competitiveness and long-term prospects for growth in living standards,” the bank said.

It also highlighted the concentration surrounding corporation tax receipts, with 10 large multi-national firms accounting for 52%of these receipts in 2023, and 10% of total government revenues last year.

“This leaves the public finances vulnerable to firm- or sector-specific shocks,” according to the outlook.

“Measures to broaden the tax base and increase government revenue as a share of national income are increasingly unavoidable,” the bank said.

It added that a slowdown in exports arising from sector-specific issues in the pharma and tech sectors in 2023 appears to be waning and stronger growth in net exports is anticipated from 2024.

Housing shortages

The Central Bank said that addressing housing and other infrastructure constraints are necessary to maintain sustainable growth in living standards.

On residential construction, the bank notes that while there have been increases in the numbers of housing units completed in recent years, there is uncertainty around the timing and scale of future increases.

“Sustainably addressing infrastructure constraints in housing, water, energy and transport should be priorities over the medium-term,” the Central Bank said.

Robert Kelly, Director of Economics and Statistics at the Central Bank, said that the Irish economy is expected to continue to grow at a moderate pace until 2026.

“Inflation is returning to sustainable levels as global influences on Irish inflation have eased, but domestic price pressures remain high,” Mr Kelly said.

“As economic activity is expected to be broadly in-line with its medium-term potential, policy attention needs to more firmly turn to bolstering that potential by addressing capacity constraints and reducing structural vulnerabilities in the economy and public finances,” he added.

The Central Bank said that the planned creation of the Future Ireland Fund and the Infrastructure, Climate and Nature Fund with the use of excess corporation tax receipts is welcome, but that they should not be seen as a solution for the challenges and opportunities arising from the demographic and climate transitions, nor the critical housing and related infrastructure gap that exists.

Article Source – Central Bank lowers growth forecast for domestic economy – RTE

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