NERI Report Series: (No. 18, July 2022)

Economic Snapshot 

‘A tight labour market but real incomes are falling’

Tom McDonnell, NERI

 tom.mcdonnell@nerinstitute.net

Introduction

The recovery from the shock of the Covid-19 pandemic has been much faster and more robust than that of previous recessions. Thanks to a strongly counter-cyclical stance, household incomes largely held up, the economy’s productive capacity was broadly protected, and private sector debt remained low. Output already exceeds pre-pandemic levels in the majority of economic sectors. The labour market is now close to full employment with labour shortages in some sectors and good prospects for nominal wage growth.

However, the invasion of Ukraine has created an unfolding humanitarian disaster. The war has also led to a surge in global energy and food prices and triggered a cost of living crisis in many countries.

Inflationary pressures will lead to a decline in real disposable incomes this year and con- sequently a slowdown in household consumption. Central banks will increasingly tighten monetary policy as a response to high inflation and rising interest rates will further depress demand. Even so, our baseline assumption is that the Republic of Ireland’s (henceforth Ireland) economy will avoid a technical recession, but that a number of Ireland’s trading partners may well experience a short recession within the next 12 months. Inflation is likely to average close to 8% this year and to only decline gradually to around 4% by the middle of next year.

Budgetary policy should avoid exacerbating inflationary pressures and concentrate on targeted measures to protect low income households as well as measures to enhance the social wage via reductions in the cost of childcare and public services such aseducation, health and public transport. The many medium-term fiscal challenges and costs (e.g. ageing, net zero transition), fragility of corporation tax receipts, and the risk of further stoking inflation suggests there is no scope for cutting taxes on a net basis.

Please find the full report attached as a pdf document.