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Minister Donohoe welcomes publication of latest Department of Finance Economic Insights

The Department of Finance today (14 December) published the Winter 2021 edition of its Economic Insights series. Commenting on the release, Minister for Finance, Paschal Donohoe T,D, said:

“My Department launched its Economic Insights series earlier this year. The objective of the series is to communicate topical economic issues to a broad range of readers, particularly non-economists.

This edition includes four notes covering some of the most topical economic issues at present.  These issues - which cover inflation, labour market shortages, household incomes, and economy’s external sustainability - are discussed extensively at a domestic level, and also at many of the engagements that I am involved with internationally.

“Starting with inflation, after several decades of low inflation, the price level in Ireland is still far below what it would have been had it grown annually in line with the ECB target of 2 per cent. Nevertheless we have seen multi-decade highs in recent months. As discussed at the Eurogroup on a number of occasions recently, this is largely explained by temporary factors, which are likely to fade over time. The inflation rate should peak by the end of this year and ease during the course of next year as the temporary factors fade, demand stabilises and supply pressures ease. However, the possibility that these price dynamics prove persistent cannot be ruled out.

“On a related matter, despite the rapid recovery in the labour market since the second quarter this year, some slack remains at an aggregate level with unemployment still above pre-pandemic. However, shortages are emerging in parts of the labour market with differences in the severity of these shortages at both a sectoral and geographic (county) level. These supply and demand issues in the labour market are very important in the context of the discussion on inflation as sustained imbalances between labour demand and labour supply can lead to wage and price pressures.

“One of the reasons for the rapid recovery in the labour market is the unprecedented policy supports introduced by the Government since the onset of the pandemic. In part this involved protecting household incomes and balance sheets during the pandemic.  Indeed Ireland saw the largest increase in household disposable income in 2020 among a selection of European countries, due in large part to the PUP and EWSS schemes.  While the recovery following the global financial crisis was relatively drawn-out, on this occasion the forceful level of policy support has limited the “scarring effects” of the crisis.

“Remarkably throughout the pandemic we have actually seen an improvement in Ireland’s modified current account - our underlying balance of international payments - which recorded a large surplus last year. With external buffers therefore remaining robust during the pandemic, this suggests that there are sufficient savings to finance a strong recovery in domestic demand, including investment, over the coming years. So unlike last time, in aggregate terms, the country as a whole will not need to borrow unsustainably from abroad to fund total investment (public, private, corporate) needs in the coming years. Of course we must still be conscious of supply-side bottlenecks.”