The Central Bank has revised its forecasts for growth in the economy downwards, due to higher inflation and the impact on the war in Ukraine on the global economy.
In its quarterly bulletin, the bank says inflation this year could peak at 8% and will average out at 6.5% for the year as a whole.
In just three months since its last bulletin, the Central Bank has knocked two percentage points off its growth forecast for the economy this year and added two percentage points to its inflation forecast.
In January, it believed Modified Domestic Demand would grow this year by just over 7%.
Now it thinks growth will be more like 4.8% and inflation will peak around 8%.
Most of the reasons why are connected to the war in Ukraine.
Energy prices, already on an upward trajectory, have been pushed higher since the Russian invasion.
The price of products like fertiliser and commodities like maize have also been pushed dramatically higher.
This is causing food prices to rise and inflation to become more embedded in the economy, which is expected to hit consumer spending.
Meanwhile, the impact of the war on the wider European economy is expected to reduce growth in exports.
And a shortage of some building materials is expected to have a negative impact on construction.
The Central Bank expects aggregate earnings in the economy to decline for the first time since 2013 this year, due to inflation.
It expects compensation per employee to go up by 2.3% but after inflation is taken into account, it will go down by 4.2% this year in real terms.
In its bulletin, the bank says the impact of the increase in several commodity prices have yet to feed through to inflation. It projects that food inflation here will, as a result, reach 5.5% this year.
This will have a disproportionate effect on those on lower incomes.
It also warns that any moves towards the rationing of gas at a European level will also have knock-on effects for Ireland.
It warns this would have “…significant negative implications for the output and exports of energy-intensive manufacturing sectors.”
It says the easing in energy inflation which had been expected later this year, has now changed due to the Russian invasion of Ukraine and its impact on certain commodity markets.
It warns there is considerable uncertainty over its forecasts for inflation to decline significantly next year and the year after.
It estimates the costs of assisting refugees from the war in Ukraine will be around €1billion this year, which is expected to be met from the Covid contingency fund.
This is expected to rise to €2.5billion next year before declining to €1.5billion in 2024.
It said that despite the challenging conditions, a tightening labour market is expected over the forecast horizon, and in that context broader-based wage growth consistent with economic fundamentals is welcome, especially as real incomes will likely fall this year.
However, the Central Bank said where growth in wages or profits respond entirely to the currently high rates of inflation, or are detached from underlying productivity growth, the likelihood increases that harmful higher inflation becomes embedded.
The one bright spot in the Bank’s forecasts is for a rebound in the public finances.
They are expected to move into a surplus of €2.6 billion or 1% of GNI next year.
Article Source – Central Bank revises downwards economic forecast – RTE – Robert Shortt