The Central Bank has said the economy is expected to continue to grow strongly this year.
Its latest Quarterly Bulletin forecasts growth in the domestic economy of just over 7% in 2022.
However, inflation is expected to be higher for longer than previously thought, although it is expected to wane in the second half of this year.
The latest bulletin from the Central Bank said the economic impact of the Omicron wave of Covid-19 was smaller than previous stages of the pandemic.
There has also been an increase in consumption. That involves people spending more on goods and services, and the Bank expects more pandemic savings to be spent which will continue to boost the economy.
The faster recovery has meant more people returning to work with a record high for the percentage of women in the workforce. There has also been a big increase in part-time work by younger workers.
The rebound has also been good for the public finances, which are expected to move into a surplus of €3.4 billion next year.
But inflation remains a concern. It is expected to average out at 4.5% this year. Energy prices are expected to stabilise but not to fall.
The Central Bank has warned that gas prices could rise further in the event of a Russian invasion of Ukraine.
Mark Cassidy, Director of Economics and Statistics at the Central Bank, said uncertainty surrounding Russia’s intentions has already been one of the factors driving higher international gas prices, affecting prices for electricity and gas that households and businesses are having to pay here.
“Essentially the strong economic recovery and extreme weather conditions have depleted stocks of natural gas in Europe making Europe even more dependent on imports from Russia,” Mr Cassidy said.
“Anything that calls into question the availability of these supplies from Russia will put further upward pressure on prices that are already very high.”
Wages have picked up across many sectors of the economy. High vacancy rates leads the Central Bank to conclude there is scope for broad-based wage growth.
The Central Bank still believes much of the current surge in inflation is related to energy prices on international markets. It notes that in November, on an annual basis European gas prices were 470% higher, the benchmark Brent crude oil was 87% higher while coal was 140%.
All of this has fed into household energy bills that were 30% higher in December on an annual basis with transports costs going up by a similar amount.
However, the Bank also believes that based on prices in the futures markets, which indicate where the market believes prices will be months ahead, prices will stabilise later this year. But it will take longer for them to come down.
Higher private sector rents, which are up around 8% an annual basis, are another factor in driving prices higher in Ireland.
The rapid improvement in the jobs market now threatens to add another volatile element to the mix. The Bulletin says that “…as the labour market tightens, the potential exists for second-round effects through higher wages and other business costs being passed through to consumer prices in the years ahead”.
Unemployment is expected to fall to 5.8% this year.
The Bank notes that recent employment gains have been led by more women joining or rejoining the workforce, bringing the female participation rate to 59.8%, its highest level ever. The jobs are concentrated in professional services and education and are primarily full-time and higher-skilled.
There has also been a big take-up of part-time jobs by younger workers, a trend that has happened in other countries too. The Bank is not so sure these jobs are as sustainable as many are in firms dependent on programmes like the Employment Wage Subsidy Scheme.
The economy overall has been very resilient throughout the pandemic, and the Bank draws particular attention to the ICT sector.
The sector added more jobs (8,596) than any other sector in 2020. It also has the highest weekly earnings and it contributed €5bn in corporation tax and income tax combined, surpassed only by the manufacturing sector.
It also notes that contract manufacturing, where firms located in Ireland have products made for them abroad but they are still counted as ‘Irish’ exports, increased in value by €35bn in the first three quarters of last year.
This made up 36% of the increase in the value of exports over this period.