The Central Bank has lowered its forecasts for growth in the economy based on weaker exports from multinationals in Ireland, but has left its outlook for inflation broadly unchanged.
In its Quarterly Bulletin, published today, the bank also said the Government's spending plans for the upcoming Budget risk adding to inflation.
The bank forecasts that inflation, measured by the Harmonised Index of Consumer Prices, will average at 5.4% this year, up slightly from its summer forecast.
It expects inflation will decline to 3.2% next year and 2.3% in 2025.
However, core inflation, which excludes energy and food, will remain at 2.7% in 2025.
It has revised its estimate for growth measured by Modified Domestic Demand, which captures activity in the domestic economy, down to 2.9% this year and 2.6% next year.
Exports of goods and services, which had grown by 13.9% last year are expected to slow to growth of just 0.2% this year, before returning to growth of 2.9% next year.
The bulletin points out that goods exports more than doubled in value in the decade between 2012 and 2022.
Approximately 80% of the value of goods exported are accounted for by pharmaceuticals and machinery.
Delving deeper into the data, it finds the declines are concentrated in vaccines and semiconductors.
It speculates that the decline in exports of vaccines may be due to a fall off in demand following the Covid-19 pandemic, while the fall off in exports of semiconductors may be due to trade tension between the US and China.
We need your consent to load this rte-player contentWe use rte-player to manage extra content that can set cookies on your device and collect data about your activity. Please review their details and accept them to load the content.Manage Preferences
"The decline in trade in the first half of 2023 is a reminder of the wider risks to the Irish economy from the concentration of exports in a small number of highly globalised, multinational-dominated sectors," the report states.
The Central Bank's Director of Economics and Statistics, Robert Kelly told the Oireachtas Committee on Budgetary Oversight the increase in core spending outlined in the government’s Summer Economic Statement 'adds to short-run inflation.’
He added the spending plans ‘if allowed to persist over the medium term, will damage Ireland’s competitiveness, and the real gains in living standards Ireland benefits from having vibrant export-oriented businesses operating in the State.’
Mr Kelly also said that the growth in tax revenue over the last five years was ‘almost identical’ to what happened over the period from 2002-2007.
He said corporation tax accounts for 45% of the growth in tax revenue and is concentrated in a small number of firms.
In an answer to a question from Labour's Ged Nash TD on how much lower the Bank’s inflation estimate for next year might be in the absence of the additional spending planned by the government, the Bank's Head of Irish Economic Analysis Martin O'Brien answered: 'between two and a half and three percent.’ The Cental Bank’s estimate for inflation in its Quarterly Bulletin published today is 3.2%.
The Cental Bank’s estimate for inflation in its Quarterly Bulletin published today is 3.2%.
Gillian Phelan, Head of Monetary Policy at the Bank, said much of the effect of the interest rate increases to date have not yet passed through to households. Much of the reduction in inflation to date, has been a reduction in energy and food prices.
Finance Minister Michael McGrath has sought to dampen expectations ahead of the Budget saying Government could not do everything.
The Minister added that it would be a "good budget" and it would provide help to people struggling with the burden of the cost of living.
However, he said the one off measures would not be on the same scale as last year, but the payments would be paid out in the final three months of this year.
The Minister's caution is based on the amount of money available to Government and a desire not to stoke inflation.
He added that the Budget would contain tax changes to allow people keep more of their earnings.
The Minister of Public Expenditure has also sought to downplay expectations ahead of the Budget saying Government did not want to turn a global inflation problem into an Irish inflation problem.
Paschal Donohoe said he understands why expectations are high because prices are still rising and this is being felt by households.
But he warned that it was important not to spend tax receipts which Government "may find out in the near future" are not permanent sources of income.
The Minister also confirmed that the Government hope to have an oversight body in place by next year to monitor the pay of senior civil servants and top executives in semi-State companies.
This body, which will require legislation to be put in place, will provide a "policy framework" for decisions on the pay and conditions of those at the helm of both the civil service and the semi-state sector.
Additional reporting: Mícheál Lehane