Written answers

Tuesday, 9 May 2023

Photo of Bernard DurkanBernard Durkan (Kildare North, Fine Gael)
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228. To ask the Minister for Finance the extent to which the economy continues to be based on sound economic principles; and if he will make a statement on the matter. [21777/23]

Photo of Bernard DurkanBernard Durkan (Kildare North, Fine Gael)
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231. To ask the Minister for Finance his intentions to continue to ensure best practice economic performance in the future, keeping in mind the need to protect the stability of the economy and having regard to experiences in the past; and if he will make a statement on the matter. [21781/23]

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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I propose to take Questions Nos. 228 and 231 together.

Over the course of the last year, Ireland has faced numerous headwinds. First, Russia’s invasion of Ukraine induced a crisis in global energy markets which sparked decades-high levels of consumer price (HICP) inflation. Secondly, inflation became an increasingly broad-based phenomenon, with spill overs from energy prices to many other sectors. Finally, the ECB has embarked on a front-loaded process of monetary policy normalisation, with 7 successive interest rate hikes culminating in a total increase of 3.75 percentage points in the main policy rate since last July.

Despite these numerous economic headwinds, Ireland’s economic fundamentals remain strong and the economy continues to be based on sound economic principles. The underlying strength of the Irish economy is most evident in the labour market. A record 2.6 million people were in employment in the fourth quarter of last year, while the unemployment rate stood at just 3.9 per cent in April.

Helped by a buoyant labour market and strong household balance sheets, personal consumption growth was robust in the final quarter of last year despite inflationary headwinds. My Department expects the robust performance of the Irish economy to continue into the future, but is nevertheless acutely aware of the risks to the outlook.

Incoming data suggests that inflation has now passed its peak and is on a downward trajectory. In the recent Stability Programme Update, average annual inflation was forecast at 4.9 per cent and 2.5 per cent for this year and next year, respectively. The anticipated easing of inflationary pressures is expected to pass through to an improved outlook for the domestic economy, with MDD growth of 2.1 per cent projected for this year, a significant upward revision from the Budget 2023forecast last autumn.

Despite this improved economic outlook, I am acutely aware that the outlook for the Irish economy remains highly uncertain. My Department continues to closely monitor macroeconomic developments both domestically and abroad.

Photo of Bernard DurkanBernard Durkan (Kildare North, Fine Gael)
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229. To ask the Minister for Finance the extent to which the Government's economic policy continues to be able to withstand economic shocks; and if he will make a statement on the matter. [21778/23]

Photo of Bernard DurkanBernard Durkan (Kildare North, Fine Gael)
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230. To ask the Minister for Finance the extent to which his Department continues to monitor any and all potential economic threats to the economy here and retain the ability to respond in the event of unforeseen difficulties; and if he will make a statement on the matter. [21780/23]

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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I propose to take Questions Nos. 229 and 230 together.

Over the last number of years, the Irish economy has faced numerous economic shocks in quick succession. Brexit, the Covid-19 pandemic, and most recently, the inflationary cycle brought about mainly as a result of Russia’s invasion of Ukraine, have each posed significant challenges to the Irish economy.

Throughout each of these shocks, the Irish economy has proven to be remarkably resilient. Ireland’s economic fundamentals remain strong and this has been most clearly evident in the labour market. A record 2.6 million people were in employment in the fourth quarter of last year, while the unemployment rate stood at just 3.9 per cent in April. Despite inflationary pressures on households’ real incomes, personal consumption remained robust in the fourth quarter, aided by a strong labour market and a buffer of ‘excess savings’ built up during the pandemic years.

While recent evidence suggests that we are now past the peak of this inflationary cycle, the inflationary and economic outlook remains highly volatile. The recently published Stability Programme Updateoutlines a number of short and medium-run risks to the outlook.

In terms of the near-term inflationary outlook, it is possible that further disruption to energy supplies or harsh weather conditions coming into the winter ahead could exacerbate imbalances between supply and demand and cause energy prices to spike again. Furthermore, there is a real risk of a wage-price spiral emerging as the economy is clearly operating at, or possibly beyond, full employment and prices remain elevated. My Department also continues to monitor the possibility of an emergent sector or firm-specific shock in the multinational sector which could be damaging to the economy. I am also cognisant of the profound medium-term challenges that the Irish economy will inevitably face, such as an aging population and the dual transition of digitisation and decarbonisation.

Given our strong economic fundamentals, I am confident that we will be prepared for and able to respond to these, and other, economic threats.

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