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SME-heavy services sector will need consumption boost

Accommodation output was almost 38% lower in the last quarter of 2022 compared to the same period in 2019
Accommodation output was almost 38% lower in the last quarter of 2022 compared to the same period in 2019

Private consumption will need to increase in order to help the services sector deal with the expiration of Government pandemic and cost of living supports.

But the latest SME Market Monitor from the Banking and Payments Federation Ireland (BPFI) also says disposable income should rise over time as uncertainty around inflation and energy costs eases.

This follows a two-thirds increase in household income growth over the long-term between 2011 and 2021.

"While costs have increased due to high inflation, average household incomes seem to have kept pace and on average, households slowly increased their post-pandemic spending and maintained high level of savings at rates of around 20% compared to about 10% pre-pandemic," said Brian Hayes, chief executive of the BPFI.

"Average inflation is likely to gradually decline over this year, but price levels are expected to remain high unless we see significant declines in average prices across the economy."

"Nonetheless, household consumption is likely to increase gradually once uncertainty around energy prices as well as the general inflationary trend eases and real disposable incomes should recover."

Mr Hayes added that as Government supports expire, many SMEs in the services sector will be relying on increased consumer spending.

The monitor also outlines how employment reached 2.6m at the end of last year, the highest level since those records began in 1998.

It follows a 12% growth in the Irish economy last year, with the multinational sector acting as the main engine.

Some key small and medium sized enterprise sectors though, like accommodation, output is still lower than it was before the Covid-19 pandemic began, the analysis says.

"Today's report shows that Ireland’s economy remains robust, with high employment levels and income growth," said Mr Hayes.

"However, initial increases in energy prices seen in 2022 seem to have spilled over to the wider economy, with services inflation driving average price increases more than goods inflation."

"This is similar to the trend observed in other eurozone countries where services sector inflation nearly doubled in the past year and now accounts for almost 30% of annual inflation."