Strong wage gains set to underpin growth in consumer spending, says AIB

Rising wages will see robust growth in consumer spending, AIB has forecasted, with gains in pay now outpacing the rate of inflation. 

In its Economic Forecast Report for October, AIB said inflation has returned to its normal range and is expected to remain there for the near term, with annual price levels as measured by the EU showing inflation falling to 1.9% in 2024, down significantly from 5.2% last year. 

Despite this, AIB said Ireland remains exposed to movements in international commodity prices and domestic price pressures in capacity-constrained domestic sectors, with strong gains in wages, which are now outpacing inflation, “continuing to underpin robust growth in consumer spending.”

However, the bank noted that spending growth has been “more muted than expected,” with households continuing to maintain a high level of precautionary savings.

With real wages rising, the report expects unemployment to remain close to the current low levels, with employment to top a record 2.8 million people by 2026, supported by strong population growth. 

However, AIB noted that with the economy reaching full capacity and employer demand softer, the rate of jobs growth will likely cool in the coming years to 1.5-2% per annum, compared to a gain of over 2% in 2024.

The bank is also forecasting moderate economic growth in 2024, with modified domestic demand (MDD) expected to grow by 2.3% following several years of more rapid growth. 

“Following a fall in GDP in in 2023 due to a downturn in the pharmaceuticals sector, Ireland’s industrial output and goods exports have bounced back in 2024,” AIB said.

“However, GDP remains a volatile indicator of activity, as evident in the sharp swings in growth in recent quarters, with MDD a better gauge of domestic activity. More moderate growth is expected in the coming years as the economy and labour market reach full capacity.”

Chief Economist of AIB, David McNamara added: “Our latest forecasts point to continued moderate growth in the Irish economy in the coming years. 

“This will be underpinned by strong jobs growth and real wage increases, with inflation now back to normal ranges. Rate cuts by the ECB will also support growth over the longer term. 

“However, the globalised nature of the Irish economy means we remain exposed to international geopolitical events and the risks to the outlook remain tilted to the downside at present.”

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