A stronger than expected recovery is forecast to result in activity in the domestic economy returning to pre-pandemic levels this year, according to the Central Bank.
In its Quarterly Bulletin, published today, the Central Bank also warns that in the short-term surging demand and bottlenecks in the supply of some goods will lead to higher inflation but this will not last.
It comes as the economy is rebounding faster than many had predicted.
This will see domestic demand grow by 5.5% this year and just over 7% next year.
The Central Bank expects 160,000 jobs will be created during the recovery and for unemployment to fall to 5.9% on average in 2023.
It does expect that growth will slow as the recovery takes hold. People spending normally again is expected to play “a substantial role”.
Exports will play their part too. However, the Central Bank notes that roughly three-quarters of the €26 billion rise in the value of exports in the past year has been from so-called “contract manufacturing” where goods are made and sold abroad on behalf of Irish resident firms.
All of this increased activity is expected to lead to higher inflation. However, the Central Bank believes much of this will be “transitory”.
Inflation for this year is expected to average out at 2.1% increasing to an average 2.9% next year.
However, the Central Bank warns that if there is a stronger rebound in spending, or if supply disruptions last for longer, inflation could be higher.
Wages are also expected to rise, with an average increase of 5.1% this year and 4.8% next year.
But the Central Bank notes this is not evenly spread across all sectors and is concentrated in areas such as construction and finance.
It believes what happens with the savings accumulated by some over the pandemic will have a huge bearing on the course of the economy.
The Central Bank calculates that of the €22 billion saved over the past 18 months, approximately €13-16 billion is considered “excess savings” some of which could make its way back into the economy.
On the National Development Plan, it said infrastructure investment will have to carefully managed to avoid “unnecessarily adding to inflationary pressures”.