Central Bank of Ireland's Q1 2025 Bulletin: Key insights for the Financial Services sector
In light of the ongoing global geopolitical changes, Ahmer Khan, Head of the Financial Services practice at Baker Tilly revisits the Central Bank of Ireland’s (CBI) last Quarterly Bulletin for the first quarter of 2025. It offers a comprehensive analysis of the Irish economy and highlights crucial considerations for the financial services sector, particularly insurance companies.
The bulletin acknowledged a deceleration in the pace of economic expansion amidst a backdrop of heightened global uncertainty. While the domestic economy demonstrated resilience in the preceding year, growth momentum weakened towards the close of 2024. The CBI's Business Conditions Index (BCI) indicated robust growth in the final quarter of 2024, yet it registered a negative reading in January 2025, primarily driven by contractions in retail sales and industrial output within domestic sectors.
Inflationary pressures experienced a slight uptick in recent months, predominantly fuelled by the services and energy sectors. The CBI forecasts headline inflation to moderate from 2025 onwards, with services anticipated to remain the primary contributor. Concurrently, the unemployment rate is projected to experience a gradual increase as the economy's growth moderates, although it is expected to remain below the 5 per cent threshold.
The CBI's medium-term outlook suggests continued growth in Modified Domestic Demand (MDD), albeit with a balance of risks skewed towards the downside due to escalating global economic tensions. Household consumption is projected to be the principal driver of MDD growth over the forecast horizon, underpinned by a resilient labour market supporting robust income growth. However, this positive impact on consumption may be tempered by a gradually increasing household savings rate.
Real household incomes are anticipated to continue their upward trajectory, bolstered by further employment growth and an expected moderation in inflation, averaging below 2 per cent over the forecast period. While employment growth has moderated following exceptional gains since 2022, and indications of increased labour supply have emerged in certain sectors, overall labour market conditions remain tight, with the unemployment rate projected to stay near its current low levels, indicative of an economy operating close to full employment.
In the context of housing, the CBI emphasises the importance of making residential development a more attractive investment sector through incentivising productivity, scale, and modern construction methods, promoting the active use of available land for residential purposes, and maximising land availability for housing construction.
Services are expected to be the main driver of inflation over the forecast horizon, although the contribution of energy has been revised upwards based on updated global commodity price assumptions. Continued high levels of net inward migration and increased labour force participation are forecast to augment labour supply in the coming years. The central forecast anticipates a further easing of headline inflation, despite a slight upward revision to 2.2 per cent for 2025, followed by downward revisions in subsequent years.
The bulletin also addresses structural shifts within the labour market and the broader economy, including the increasing adoption of new technologies such as Generative Artificial Intelligence (AI). CBI research suggests that sectors like professional and personal services (education and healthcare) are particularly exposed to AI adoption, yet these sectors also present opportunities for productivity gains through AI's complementary role to labour input.
Furthermore, the bulletin notes an upward trend in the household savings ratio, influenced by changing demographic characteristics and related preferences. This shift also entails a changing composition of household savings, with an increasing potential for investments in non-deposit financial assets, potentially opening avenues for alternative funding streams for businesses, particularly in infrastructure development such as housing and energy.
The bulletin underscores the interconnectedness of domestic economic conditions with global developments, particularly the unprecedented rise in policy uncertainty stemming from evolving geoeconomic relationships. The signalled policy stances of the new US administration and the anticipated responses from other major economies present a significantly altered landscape for the Irish economy compared to recent years. The potential for widespread implementation of tariffs and non-tariff barriers, coupled with the necessity for Europe to adapt its geopolitical priorities, introduces substantial risks to the economic outlook.
The CBI stresses the vulnerability of public finances to the realisation of these substantial geoeconomic risks, underscoring the need for considered policy action. Priority should be given to establishing an effective anchor to guide fiscal policy, within which the tax base should be broadened, capital expenditure prioritised, and meaningful structural reforms undertaken to facilitate greater private sector investment. These measures are deemed essential to create the necessary fiscal and economic space to sustainably deliver higher levels of investment in housing and infrastructure, alleviate capacity constraints, enhance competitiveness, and improve overall living standards.
For the insurance sector, while the Quarterly Bulletin's primary focus is on the broader economic landscape, the insights into inflation, interest rates, and overall economic stability are crucial for solvency assessments and investment strategies. The anticipated moderation in inflation, while positive, requires careful consideration in pricing and reserving. The evolving global uncertainty highlighted by the CBI also necessitates robust risk management frameworks within insurance companies.
In conclusion, the Central Bank of Ireland's Q1 2025 Quarterly Bulletin provided a nuanced perspective on the Irish economy, acknowledging its underlying resilience while highlighting the significant challenges posed by global policy uncertainty. The insights presented are pertinent for the financial services sector, including insurance companies operating in Ireland, and should inform their strategic decision-making and risk management practices. Baker Tilly Ireland, under the leadership of Ahmer Khan, will be closely monitoring these developments to advise clients in navigating this evolving economic environment.
