There is around €22bn of surplus, ‘above trend’, savings behind the scenes in the Irish economy. The destination of these will have a great bearing on the direction of the economy.
Some could be invested in the housing market, adding to existing demand pressures. More generally, they should support consumption and domestic demand, fueling a new period of job-rich growth. In January, the Central Bank of Ireland said up to 167,000 jobs could be created in the Irish economy over the next two years as it shrugs off the effects of the pandemic and consumer spending rebounds .
However, there is a new fly in the ointment that threatens this thesis: inflation. This has the potential to erode the value of these savings and make consumers more cautious, potentially mitigating the impact of the unwinding of the big savings. As employers’ group Ibec noted in its latest outlook report, much of the savings will be used to cushion rising energy costs rather than discretionary spending.
This means that much of it will exit the country through energy imports rather than being recycled back into the national economy through pubs, restaurants and retail.
Ibec chief economist Ger Brady estimates that for every 10% increase in energy costs, the amount of consumer spending elsewhere in the economy could fall by 0.9%, when savings and revenues are held stable, while acknowledging that there is enormous uncertainty around these measures. , in particular because of the government’s tax measures and the increase in wage demands going in the opposite direction.
Either way, the bullish talk around the savings outburst has faded somewhat, as has the outlook for growth. Ibec has cut its overall growth forecast for this year from more than 6% to 4%. Although we are still in positive territory, there have been slippages.