The economy will return to pre-pandemic levels of activity this year, says the Central Bank in its latest Quarterly Bulletin.

It forecasts that modified domestic demand (MDD) will grow by 5.5 % in 2021, with the rebound to be followed by robust growth of 7.1% in 2022 and 4.1% in 2023.

But this, combined with supply bottlenecks and labour shortages in some sectors will lead to higher inflation in the near term, the CBI says.

Director of economics and statistics Mark Cassidy (pictured) said: “We now expect domestic economic activity to be back to pre-pandemic levels this year and broadly to where it would have been in the absence of the pandemic by end-2023. At the same time, businesses and households are facing higher costs and prices due to a combination of supply bottlenecks and surging demand, resulting in higher transportation, energy and other input costs.

“Many of the current drivers of inflation are expected to ease through 2022 and 2023. However, a stronger rebound in household spending, more persistent supply disruptions, or a slower labour supply response could result in higher inflation than anticipated."

In Association with

The monetary authority’s predictions for growth are slightly ahead of those in the Department of Finance’s pre-Budget forecasts, with MDD this year forecast as 5.25% by the government as against the bank’s 5.5%, and next year 7.1% versus 6.5%.

The CBI's predictions for GDP growth, skewed by the multinational sector, are 15.3% this year, 7.2% in 2022 and 5.3% in 2023.

Earnings Growth

Cassidy added: “We expect the unemployment rate to average 7.2% in 2022, and to fall further to just under 6% by end-2023. Overall earnings growth of 5.1% is expected this year, before decelerating to 4.8% in 2022 and 3.4% in 2023.”

While the bulletin doesn’t directly address the government’s expansion of the National Development Plan, it does sound a cautionary note given the level of international economic uncertainty.

“From a domestic perspective, as the necessary pandemic support measures are unwound, it is important that pro-cyclical imbalances are avoided as the focus turns to medium-term challenges,” the bulletin states. “In doing so, necessary infrastructure investment should be carefully managed, and supported by wider policy initiatives, so that the challenges in housing and in climate action can be addressed without unnecessarily adding to inflationary pressures.

“Ensuring sustainability of the public finances by achieving a lower debt ratio over the medium-term will help to avoid excessive inflationary pressures domestically, while building long-term resilience and ability to respond to future shocks.”

The bulletin is available for download here.