Central Bank warns against giveaway budget amid concerns over 'sticky inflation'

Bank forecasting exports and the pharmaceutical sector to rebound this year after a contraction in 2023

According to the Central Bank's latest economic bulletin, growth is expected to tepid over the coming years growing by 2% annually as measured by modified domestic demand. Picture: Leah Farrell/Rollingnews.ie

The Central Bank of Ireland is forecasting exports and the pharmaceutical sector to rebound this year after a contraction in 2023 which suggests good news for the exchequer in advance of a general election.

However, despite the potential increased tax take this might bring, the Central Bank has warned against a giveaway budget this year, saying a large increase in current spending could feed domestic pressures and add to inflation.

According to the Central Bank’s latest quarterly bulletin, growth is expected to be tepid, with modified domestic demand (MDD) — a measure that excludes the activity of multinationals — forecasted to grow at 2% a year through to 2026.

MDD only grew by 0.5% in 2023 following a post-pandemic surge of growth in 2022 of 9.5%.

Gross domestic product — which is skewed heavily by multinational corporations — contracted by 3.2% in 2023 but is expected to recover to 2.8% this year. 

A large part of this recovery is expected to come in in the pharma sector, which saw a large drop-off in covid-related exports during 2023.

Director of Economics and Statistics at the Central Bank Robert Kelly said much of this rebound was a “normalisation”, adding there was no reason to believe there was going to be a “large reduction in the level of demand for pharmaceuticals”.

The pharmaceutical sector contributes a large portion of corporation tax to the exchequer and a rebound in this area could leave the Government with additional revenues to spend.

However, Mr Kelly warned a large increase in current spending in a giveaway budget would feed into domestic pressures and lead to more “sticky inflation”, as well as impact Ireland’s competitiveness.

"We have a rule in place, we would expect and advise that we stick within that rule again,” he said, referencing the Government’s rule of not increasing expenditure by more than 5% per year.

This year, headline inflation is expected to reduce to 2% as external price pressures ease.

International growth is set to be “relatively weak” due to uncertainties including tighter monetary policy and geopolitical tensions.

A number of capacity constraints are also expected to weigh on the domestic economy — mainly housing and a tight labour market.

The Central Bank suggested a contraction in the commercial building sector may be facilitating an expansion in residential housing investment. It is projecting for 35,000 homes to be delivered this year, increasing to 37,000 next year.

The Housing Commission has said up to 62,000 homes may be needed every year till 2050. 

In relation to the labour market, it said shortages remain significant in the public service as well as the financial and other professional services sector.

In addition to the bulletin, the Central Bank released a new report which showed the wealthiest 10% of Irish households own €518bn, or 48%, of the total household wealth in the country.

This is more than five times the amount held by households in the bottom half of the net wealth distribution, which equates to €98bn, or 9%.