Individual households are not set to feel the relief of lower inflation in their pockets until the end of next year, the Central Bank believes.
ut the same analysts think Government is set for another bumper budget surplus of €7.8bn this year – after €5bn in 2022 – thanks to a higher tax take and the end of some of its cost-of-living supports.
In a more upbeat economic forecast than its last one three months ago, the Central Bank predicted the domestic economy would expand by 3.1pc this year, 2.9pc next year and 2.6pc in 2025, despite close to zero growth in Ireland’s main trading partners in Europe and the US.
Gross domestic product – including volatile aircraft leasing and patent activity – is set to expand faster, at 5.6pc this year, after surging by 12pc last year on the back of continued pharmaceutical and tech exports.
Inflation is expected to slow more quickly than previously forecast thanks to a fall back in energy prices, averaging 5pc this year, 3.2pc next year and 2.2pc in 2025, just above the European Central Bank’s 2pc target.
Risks to the forecast are “less tilted to the downside” than they were last year, the bank said. Although pay rose last year, inflation eroded those gains.n
“For a given household that has, you know, two people working, year on year, it wouldn’t have reflected that gain. They would have had, if you like, a decrease in purchasing power,” said Robert Kelly, the Central Bank’s director of economics and statistics.
“In real terms, yes, by the end of next year, we would expect growth on a per-household basis.”
The Central Bank predicts real gross disposable income will grow by an average of 3.4pc this year and next year as the economy grows and wages rise, which should eventually filter through to people’s pockets.
“These income developments are expected to contribute to an improved consumer expenditure profile,” the forecast said.
The positive boost is being tempered by tighter monetary policy from the European Central Bank which is raising interest rates to cut inflation.
But the bank has warned that workers’ wages and firms’ profits will need to be “anchored in underlying productivity growth” so as not to feed back into higher prices.
“What we would typically expect is that over the course of two years, you would still continue to see impacts on, say, firms’ pricing behaviour,” said Martin O’Brien, head of the Central Bank’s Irish economic analysis division.
“How businesses are actually responding to that, whether they be in the food sector or more generally, is still fairly uncertain.”
The “timely” unwinding of one-off budget measures will also be important to tame inflation.
The bank says the Government can run a €15.8bn budget surplus by 2025 if it ends supports for the cost-of-living crisis, Ukrainian refugees and building-redress schemes.
“Domestic policy has a significant role to play in how the economy adjusts to the negative supply-side shock that the war has brought about,” the Central Bank said in its forecast.
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