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Government cuts growth forecast amid price surge

The Government has cut its forecast for growth in the domestic economy this year, mainly due to higher energy prices as a result of the Russian invasion of Ukraine.

The Department of Finance’s Stability Programme Update (SPU) also expects inflation to peak at 6.75% in the second quarter of this year.

It says that higher raw-materials prices, as well as global supply-chain disruptions and a tight labour market, are also resulting in higher non-energy prices.

Deficit this year

The department says that the economic and fiscal projections set out in the SPU come against the backdrop of a fading pandemic, whose positive impact is offset by war in Ukraine, and the associated economic and financial sanctions.

The update now projects that modified domestic demand – a measure of growth in the domestic economy – will rise by 4.25%, This compares to a previous 6.5% forecast.

After COVID-19 spending pushed the general government deficit to €8.1 billion last year, the SPU expects a deficit of €2 billion for this year, with a “modest surplus” of €1.2 billion in 2023.

The update says that these figures reflect the unwinding of pandemic-related spending, although this will be partially offset by “significant expenditure” to support Ukrainian refugees.

Uncertainty

The document warns that the risks to its main forecasts are “firmly tilted” to the negative side, due to the degree of uncertainty – particularly on energy prices.

“Under an alternative scenario where oil and gas prices increase by 50% and 75% respectively relative to the central scenario, inflation would increase by an additional two percentage points this year, peaking at 9.25% in the third quarter,” it states, adding that this would hit consumer spending and overall demand in the economy.

The document describes a recovery in the labour market last year as “remarkable”, however, adding that the annual average unemployment rate is expected to fall to 6.25% for the year as a whole, closing the year at just over 5.5%.

On the impact of higher energy prices, Minister for Finance Paschal Donohoe (pictured) warned that, while the Government would try to minimise the fall-out on those who are ill-equipped to respond, resources were limited.

“Government will share, but cannot assume all, the burden of higher energy price,” he said.