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Central Bank predicts 6.2% wage hike this year

The economy is operating at capacity, according to the latest Central Bank bulletin.

Headline inflation has declined, but core inflation is picking up and is now expected to be 4.9% this year.

The unemployment rate is now below 4%, for the first time since 2004, with tight labour market conditions expected to continue. 

Modified domestic demand is forecast to grow by 3.7% in 2023 and 2.5% in 2024 and 2025, according to the Central Bank.

Robert Kelly (director of economics and statistics) said: “With wholesale energy and food prices continuing to ease, domestic factors have begun to play an important role in the inflation outlook. 

“Growth in the domestic economy this year is expected to be slightly stronger than previously anticipated.  Various indicators, particularly from the labour market, point to the economy operating at capacity. 

“The tightening of monetary policy is beginning to feed through the economy and will contribute to dampening demand and economy-wide price pressures.  In this environment, it will be important that fiscal policy charts a careful course that does not exacerbate the imbalance between demand and supply conditions across the economy.”

Growth in domestic demand has resulted in a gradual improvement in household real income as inflation eases and the tight labour market spurs higher wage growth.

Reduction

A more definitive reduction in the savings ratio to pre-pandemic norms is also observed.

Continued investment in the State in plant and machinery by high-growth sectors is also expected to support growth in modified investment 

Over Q4 2022 and Q1 2023, the unemployment rate reached multi-decade lows as consumption expanded, as did the output of domestically-oriented sectors of the economy. 

The labour market is forecast to remain very tight with labour force growth being driven by continued net inward migration.

The unemployment rate is expected to remain at 4% until 2025.

Wage growth

Slower employment growth and a pick-up in wage growth is expected as capacity constraints become more binding. 

Compensation per employee is forecast to rise by 6.2% in 2023, 5.9% in 2024 and 4.4% in 2025, the Central Bank predicts.

This rise in labour costs is expected to be accompanied by relatively muted growth in productivity and profit margins in order for the easing of the core inflation forecast in 2024 and 2025 to emerge as predicted.

Discretionary government spending increases or tax cuts outside the bounds of the net 5%  spending rule would add significantly to demand and inflation in the coming years, the regulator warns.