The Central Bank has lowered its forecast for economic growth, due to rising inflation and the impact of the war in Ukraine on the global economy.
In its quarterly bulletin, the bank indicates that inflation this year could peak at 8% and will average 6.5% for the year as a whole.
In just three months since their last bulletin, the Central Bank has cut two percentage points from its growth forecast for the economy this year and added two percentage points to its inflation forecast.
In January, it estimated that modified domestic demand would increase this year by just over 7%.
Now he thinks growth will be more like 4.8% and inflation will peak around 8%.
Most of the reasons are related to the war in Ukraine.
Energy prices, already on an upward trajectory, have been pushed higher since the Russian invasion.
The price of products such as fertilizers and commodities like maize have also risen dramatically.
This leads to higher food prices and more entrenched inflation in the economy, which should affect consumer spending.
Meanwhile, the impact of the war on the wider European economy is expected to reduce export growth.
And a shortage of certain building materials is expected to have a negative impact on construction.
The Central Bank expects the economy’s aggregate earnings to decline for the first time since 2013 this year, due to inflation.
It expects compensation per employee to rise by 2.3%, but after adjusting for inflation, it will fall by 4.2% this year in real terms.
In its bulletin, the bank asserts that the impact of the rise in the prices of several raw materials has not yet been transmitted to inflation. He predicts that food inflation here will accordingly reach 5.5% this year.
This will have a disproportionate effect on low-income people.
He also warns that any move towards gas rationing at European level will also have knock-on effects for Ireland.
It warns that this would have “…significant negative implications for the production and exports of energy-intensive manufacturing sectors.”
It indicates that the slowdown in energy inflation that was expected later this year has now changed due to the Russian invasion of Ukraine and its impact on some commodity markets.
He warns that there is considerable uncertainty about his forecast of a significant decline in inflation next year and the year after.
He estimates that the cost of helping refugees from the war in Ukraine will be around 1 billion euros this year, which should be covered by the Covid provident fund.
This amount is expected to reach 2.5 billion euros next year before dropping to 1.5 billion euros in 2024.
The only positive point in the Bank’s forecasts is that of a rebound in public finances.
They are expected to have a surplus of €2.6 billion or 1% of GNI next year.