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Inflation hits consumer spending in blow to economic growth

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Finance Minister Paschal Donohoe

Finance Minister Paschal Donohoe

Goodbody Stockbrokers economist Dermot O'Leary

Goodbody Stockbrokers economist Dermot O'Leary

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Finance Minister Paschal Donohoe

The impact of inflation stalled the recovery in real consumer spending at the beginning of the year even as headline GDP growth continued to soar on the strength of multinational companies.

The Irish economy grew by nearly 11pc in the first quarter compared to the same period last year due to the booming multinational sector and a positive trade result, according to national accounts data published by the Central Statistics Office (CSO) on Friday.

While modified domestic demand – a more accurate reflection of economic activity – also grew by 11pc, on a quarterly basis it fell 1pc as consumer spending declined along with government spending and investment.

Nominal consumer spending was 6pc higher relative to pre-pandemic levels, but real consumer spending fell 2pc when inflation was factored in, showing that higher prices are having a dampening effect on economic activity.

“[The] data confirms that the Irish economy has rebounded strongly from its lockdown slumps, but that the recovery in real consumer spending stalled because of record high inflation in the opening months of the year,” said Goodbody chief economist Dermot O’Leary.

“Inflation is already biting and will continue to be a feature over the coming quarters.”

The Department of Finance acknowledged the figures confirmed a weak first quarter for the domestic economy, which faced challenges including the Omicron wave, increasing inflation and the disruption caused by Russia’s invasion of Ukraine.

“While GDP growth was exceptionally strong in the first quarter, growing by 10.8pc compared with the previous quarter, part of this is no-doubt a ‘washing-out’ of some of the one-off factors that led to the unusual negative quarter at the end of last year,” said Finance Minister Paschal Donohoe.

“It is important also to put these volatile figures into context.”

KBC chief economist Austin Hughes said the data presented a “confusing picture”.

“This result is very much at odds with the evidence of strongly positive economic momentum coming from other recent indicators such as yesterday’s tax receipts.”

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