Ministers downgrade growth forecasts, citing ‘severe’ economic shock

The war in Ukraine could lead to fuel rationing in an extreme scenario, the top economist in the Department of Finance has warned, but he suggested the economy would still grow even if the supply of gas and oil was interrupted.

The projection was set in an updated forecast from the department in which the Government said it was setting aside a further €3 billion to cover the cost next year of sheltering war refugees from Ukraine. The figures come as the Government strives to come to terms with fallout from the Russian invasion, which has set off a third “severe” economic shock after Brexit and Covid-19.

“There’s a very real possibility of further energy price increases, also the possibility we simply cannot access energy – there might have to rationing etc,” chief economist John McCarthy told a press conference.

The department’s central scenario remains that energy prices stay high but with no break in supply. That is the assessment behind its projection of 6.25 per cent headline inflation this year.

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But the annual Stability Programme Update forecast also modelled the impact of a further 75 per cent surge in gas prices from current elevated levels and a further 50 per cent jump in oil.

“Our overall estimate is that that would add about two percentage points to inflation in a full year – and it would meant that actual HICP [harmonised rate of] inflation could hit 9 per cent in the third quarter – and probably take about two percentage points off growth rate of the economy,” Mr McCarthy said.

That assessment suggests that the growth in modified domestic demand, the department’s preferred measure of economic activity, would dip to 2.25 per cent this year if full and constant energy supplies were not available.

Slower growth

Minister for Finance Paschal Donohoe said: "While we are, in a more extreme scenario, still indicating that we would expect the Irish economy to grow, it would be a significantly lower level of growth than we will have seen at any point for some time."

Mr Donohoe said he had no further scope for tax measures to ease cost-of-living pressures due to rising energy costs.

Although Minster for Public Expenditure Michael McGrath signalled “exploratory discussions” with employers and union on the impact of rising inflation, he said there would be no return to collective bargaining on wages.

“We’re not going back to full-blown social partnership or anything like that but it would be helpful for us to work towards a shared understanding with employers and trade unions in particular on the challenges facing the country,” Mr McGrath said.

The Ukraine invasion has prompted the Government to downgrade its central economic forecast to 4.25 per cent modified domestic demand growth this year, 2.25 percentage points lower than prewar figures in the October budget. This forecast assumes such growth would continue in 2023 at a rate “just below” 4 per cent.

The general government deficit was forecast to drop in 2022 to €2 billion from €8 billion in 2021. A “modest surplus” was projected for 2023, but Mr McCarthy said that would be “wiped out fairly quickly” if there further economic setbacks due to war.

The increasing war costs come after the arrival of 22,605 refugees in the State since the invasion began as the Government prepares for the possibility that 100,000 might yet arrive.

The cost of looking after refugees this year is being funded from the €2.5 billion that remains in a €4 billion coronavirus contingency fund that the Government had set aside previously.