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Inflation is forecast to fall to 5% this year and household incomes are expected to improve, according to the Central Bank.

In its latest Quarterly Bulletin, the bank expects the domestic economy to grow by just over 3% this year.

It thinks inflation will be lower this year, due to falling energy prices, and expects it to average out at 5%.

However, it warns there is little evidence that prices are actually coming down and it will take time for the inflation which has happened to pass through. It says food inflation has now overtaken energy inflation as the biggest source of price increases.

While the Central Bank does not make a forecast for the residential property market, it points to many years of undersupply in housing which is supporting demand here, despite increases in interest rates.

It notes that Ireland was the only country in the euro area where demand for mortgages rose in the final three months of last year.

The bank also forecasts that the surplus in the public finances will almost double next year to just under €15 billion, boosted by windfalls of corporation tax.

And in an analysis of export data, it concludes that approximately 40% of the value of our goods exports were actually manufactured abroad.

This so-called “contract manufacturing” is carried out mainly by multinationals and was worth €143 billion last year.

It still counts as part of our GDP, which is one of the reasons many believe that measure gives a distorted picture of how the economy is faring.

The Quarterly Bulletin also warns that Ireland’s increasing dependence on Britain as a source of our energy imports is a risk with almost two thirds of our energy needs coming from there last year.

It also analyses the recent poor performance of the UK economy and what knock-on effects this may have for the Irish economy. It concludes that Irish output will be 2% lower by 2029 than it might otherwise have been based on 2016 forecasts, prior to Brexit.

Its forecasts for Modified Domestic Demand are for it to grow by 3.1% this year and 2.9% in 2024. It expects GDP to grow by 5.6% this year and 4.8% next.

It expects the employment market to remain strong with unemployment remaining at 4.4% this year and next. This will contribute to higher wages and compensation per employee is expected to rise by 6.4% this year and 5.2% next year.

The Director of Economics and Statistics with the Central Bank said that headline inflation has “likely peaked” and has started to come down.

Assuming there are no further energy price shocks, we would expect that to continue, Robert Kelly said on Morning Ireland.

Mr Kelly said corporation tax is expected to continue to grow but said it is important the Government uses the tax to support temporary measures and to build the national reserve fund.

He also said the lack of available housing is becoming more and more of an impediment to economic activity.

Article Source: Central Bank forecasts inflation to fall to 5% this year – Robert Shortt – RTE

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