Dr. Kieran McQuinn:

I will outline our overall take on it. Wage rates have been growing. One can see a noticeable pick-up in wage rates in the economy from approximately 2017 onwards. Last year wage rates on average, and it depends on which series one uses, grew by approximately 3.5% and we expect them to grow like that again this year, and possibly increase to 4% next year. It is clear that they are going to lag behind the rate of inflation and that most people will experience negative real growth this year. There is no doubt about that. If one puts it in the longer and broader prospect, and I am talking about the aggregate, over the last three or four years when wage inflation was beginning to pick up, there were very low rates of increases in inflation in that period. Most people in the economy, particularly people working in the economy, would have experienced increases in real wages over that period. That is not to say that offsets totally what they are going to experience this year, but it is important to note that we have had very low inflation in the economy over that period.

In terms of how we see it affecting the economy into the future, and this goes back to much of the work that Ms Doorley and her colleagues have done, there is a great difference in terms of the impact on households. What we see at present, as we have pointed out, is lower income households particularly susceptible to the inflationary pressures. However, we also see the huge impact of a relatively large increase in savings which we have witnessed in the economy over the last year or year and a half. That is probably due to the payments that were introduced quite quickly. That has led to a significant increase in the savings rate. Indeed, when we are thinking about how consumption is going to evolve over the next year or 18 months, one of the big conundrums is how we see those savings levels coming into the economy. Do we see people drawing down those savings to smooth their consumption in the short run, do we see them holding onto them for precautionary reasons and so forth or do we see them diverting them into the housing market, of which we have seen some evidence?

It is very difficult to see the impact on consumption generally in the overall picture, but our take on it is that, notwithstanding the inflationary pressures, we still see consumption increasing this year and next year, even with negative real income growth this year due to inflation and the wage growth. Certainly, it is going to have an adverse impact on consumption and investment, but we still believe that those domestic sources of growth will experience positive growth over the next 18 months.