The rosy narrative around the unleashing of savings has toned down

There is about €22 billion of excess, “above trend”, savings sitting in the wings of the Irish economy. Where these go will have a large bearing on where the economy goes.

Some of it may go into the housing market, adding to existing demand pressures. More generally they're expected to bolster consumption and domestic demand, fuelling another period of jobs-rich growth. In January the Central Bank of Ireland said up to 167,000 jobs could be created in the Irish economy over the next two years as it shrugs off the effects of the pandemic and consumer spending rebounds.

However, there’s a new fly in the ointment that is threatening this thesis: inflation. This has the potential to erode the value of these savings and make consumers more cautious, potentially muting the impact of the big savings unwind. As employers’ group Ibec noted in its latest outlook report, much of the savings will be used to buffer against rising energy costs rather than used for discretionary spending.

That means much of it will be flowing out of the country on energy imports rather than being recycled in the domestic economy through pubs, restaurants and retail.

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Ibec chief economist Ger Brady estimates that for every 10 per cent increase in energy costs the amount of consumer spending elsewhere in the economy might fall by 0.9 per cent, when savings and incomes are held steady, albeit while acknowledging there is huge uncertainty around these metrics, not least because of Government fiscal measures and increased wage demands working in the opposite direction.

Either way the rosy narrative around the unleashing of savings has withered somewhat and so has the growth outlook. Ibec has cut its headline growth forecast for this year from more than 6 per cent to 4 per cent. While we’re still in positive territory, there has been slippage.