Ireland expects the fallout from the war in Ukraine to slow rather than derail economic growth this year, the finance ministry said on Wednesday, after cutting its growth forecast and hiking its inflation projections.
The ministry still expects modified domestic demand, its preferred measure of the health of the economy, to expand by 4.2% this year.
That is down from a 6.5% expansion last year and the growth of 6.5% it had forecast for 2022 six months ago.
The slowdown is mainly due to its expectation households will respond to rapidly climbing inflation by spending 4.5% less than they would otherwise have by the end of 2023.
The ministry sees inflation averaging 6.2% this year, almost three times the rate it expected in its last set of forecasts six months ago, before falling to 3% next year and 2.2% in 2024.
Under a scenario where oil and gas prices are 50% and 75% higher than forecast, inflation would jump by an additional two percentage points this year, peaking at 9.25% in the third quarter and weigh on consumer spending and economic growth.
If this is avoided, Ireland's budget deficit is expected to narrow at a faster than expected rate to 0.8% of gross national income this year on the back of a recent surge in tax receipts, and return to a surplus of 0.5% in 2023.
The 2023 figures include a new provision of €3 billion to provide funding for thousands of Ukrainian refugees arriving in the country every week, although the ministry added the risks to all its forecasts were firmly tilted to the downside.
Consumer Spending Affected
"These economic and fiscal projections come at a time when the Irish economy is grappling with its third severe economic shock in as many years – Brexit, a global pandemic and now the fall-out from the war in Ukraine," Minister of Finance, Paschal Donohoe said in a statement.
"Higher inflation will inevitably impact on the purchasing power of households. Uncertainty will also affect consumer spending and investment decisions. Despite this, the headwinds are expected to delay – but not derail – economic growth."