Irish economy to post significant growth despite Ukraine and inflation headwinds

The European Commission has forecast that inflation will weigh on household spending plans but consumption will grow nonetheless

Irish inflation, which is currently running at 7%, will average just over 6% this year before easing back to just over 3% in 2023, the new forecasts say.

Inflation will stay higher for longer, but the Irish economy will grow strongly despite facing global pressures from the fallout of the Ukraine war, the EU has predicted.

In its new spring economic outlook, the European Commission has forecast inflation will weigh on household spending plans, but that consumption will grow nonetheless, although at a slower pace than once thought, this year and in 2023.

Irish inflation, which is currently running at 7%, will average just over 6% this year before easing back to just over 3% in 2023, which will "curtail spending plans" by consumers, the new forecasts say.

Nonetheless, exports and investment plans by the multinationals based in Ireland, which are less affected than most firms by the Ukraine war, will help keep the Irish economy on track for significant growth.

Paring back its growth outlook, the EU projects Irish GDP will still grow significantly, by 5.4% this year, and by 4.4% in 2023, and post among the highest growth rates in Europe over both years.

Modified domestic demand, the measure that more accurately reflects the fortunes of the economy as experienced by most households, will despite the headwinds also grow significantly, by 4.6% this year and 3.8% in 2023.

Budget surplus 

The growing economy means that the Government is on course to post a small budget surplus in 2023, for the first time since the onset of the Covid crisis, according to the forecasts.

The EU sees the budget deficit turning into surplus of 0.4% of GDP in 2023, and for the general government debt to fall to 50.3% of GDP this year and continue to fall back to 45.5% of GDP in 2023.

"Ireland's GDP is expected to keep increasing significantly, by 5.4% in 2022 and 4.4% in 2023, although slightly slower than previously expected due to higher inflation, supply bottlenecks and uncertainty created by the Russian aggression against Ukraine, which will negatively affect private consumption and investment," according to the spring forecasts.

On consumption, the forecasts see households and businesses being pulled two ways by "opposing forces".

"On the one hand, post-pandemic conditions of expanded consumption opportunities and significant accumulated savings favour a rise in spending," the commission said.

"On the other hand, Russia’s invasion of Ukraine is a headwind to the economy," it said, noting the slump in consumer confidence as household bills increased.

However, it still forecasts the pace of private consumption after slowing will grow 5.7% this year and by 4.1% in 2023.

New challenges

The economies of the EU and the eurozone will grow, the commission forecasts.

"The outlook for the EU economy before the outbreak of the war was for a prolonged and robust expansion. But Russia's invasion of Ukraine has posed new challenges, just as the Union had recovered from the economic impacts of the pandemic," according to the new forecasts.

"By exerting further upward pressures on commodity prices, causing renewed supply disruptions and increasing uncertainty, the war is exacerbating pre-existing headwinds to growth, which were previously expected to subside," it said.