Quarterly Bulletin No.1 2022

Read the full Comment for Quarterly Bulletin No.1 2022.

Léigh tráchtaireacht ar an Timpeallacht Gheilleagrach.

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Despite the emergence of the Omicron wave of Covid-19 and the related increase in uncertainty, the economy overall is proving resilient. In the coming years, continued strong growth in output and employment are forecast, with the economy converging on its potential level of activity. Each wave of the pandemic has had progressively weaker effects on demand, albeit that conditions in more contact-intensive sectors remain constrained. As both the global and domestic economy adjust, supply conditions have been slower to normalise. These forces have contributed to higher consumer prices, and inflation is forecast to remain above the low levels seen in the decade between the financial crisis and the pandemic. However, inflation is expected to ease from current levels, as acute pandemic-related effects and energy price growth diminish in importance. 

Read this chapter in full: The Irish Economy.

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In recent years, insights from behavioural economics have increasingly been used to inform public policymaking. This has been underpinned by an appreciation of the ways in which human decision-making can be influenced by psychological biases and cognitive limitations that have the potential to lead individuals to costly and systematic errors in all facets of life, including in relation to financial products. In response, many public authorities are now seeking to design the instruments of policy to better fit the behavioural realities of the people they are designed to serve, in an effort to remediate adverse consumer and systemic outcomes, and to enhance policy effectiveness. This Article reviews the recent growth in the application of behavioural insights, the ways in which biases can impact decision making, specifically in the financial domain, and why it matters for policymakers, including the Central Bank.

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Climate change is one of the most significant issues affecting the global economy. As a small open economy, Ireland is particularly vulnerable to economic spillovers from the international impact of climate-related risks. In recognition of the potential of these risks to affect their ability to maintain both price and financial stability, many central banks, including the Central Bank of Ireland, have started to embed these risks in their analytical and modelling frameworks. In this Article, we explore the key challenges presented by climate change for central banks. We first examine the economic implications of the risks associated with continuing climate change and abrupt mitigatory actions. We then review how these risks could affect the transmission of monetary policy through conventional channels. Finally, we discuss how the Central Bank’s analytical framework needs to adapt and suggest that a suite-of-models approach offers the most practical and effective way of addressing these issues.

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The global economic outlook is expected to remain positive, owing to a strong recovery in 2021, with both monetary and fiscal policies set to remain generally supportive in 2022.

Read in full: International Outlook

This Box provides an update on Irish households’ and firms’ financing activities, focusing on recent data developments.

Read in full: Spending credit and deposits An update on Irish household and business activity

In late November, a new variant of SARS-CoV-2, designated Omicron - was identified by public health officials. From an epidemiological point of view, Omicron is more transmissible and there is evidence that existing vaccines are less effective in preventing infection from this variant compared with Delta and earlier variants.

Read in full: The Impact of the Omicron Variant of Covid 19 on the Irish Economy

The financial and economic effects of the Covid-19 pandemic have been both negative and substantial and are still being felt in most countries. While quantifying the global impact of Covid-19 on output is a complicated process, estimates suggest that the global economy contracted by 3.5 per cent in 2020, relative to the 3.4 per cent growth that had been anticipated prior to the pandemic2.

Read in full: The Irish ICT Services Sector during the Covid 19 Pandemic

Understanding the drivers of the increase in inflation in 2021 and the extent to which these reflect temporary factors in specific parts of the consumption basket or more persistent and more generalised factors is currently an important issue facing central banks in the euro area and elsewhere.

Read in full: Relative vs General price changes estimating the common component of inflation for Ireland

During 2021, there was a large surge in the price of energy commodities. The latest data for November 2021 show that the price of gas in Europe increased by 470 per cent on an annual basis.

Read in full: Modelling the duration of energy price shocks

Strong employment growth observed in both Q2 and Q3 2021 has seen aggregate levels markedly increase above pre-pandemic peaks. The scale of these unexpected employment increases poses a question as to whether this is due to technical changes arising from new data regulations, transitory pandemic-related issues, a permanent structural shift in the Irish labour market or a combination of these factors.

Read in full: Recent Developments in the Irish Labour Market

This Box identifies recent trends in the carbon intensity of employment in Ireland in the context of the 2030 carbon reduction targets. Across the EU, greenhouse gas (GHG) emission levels have declined since 2008 even though employment has continued to grow.

Read in full: The Carbon Intensity of Employment in Ireland