Leaving all the warnings about the uncertain global outlook aside and the downside risks posed by possible energy shortages in Europe, you wouldn’t guess we were in the middle of one of the most severe and aggravated cost-of-living crises in decades from the Economic and Social Research Institute’s (ESRI) latest quarterly commentary. The headline metrics still point to an economy that’s barrelling along at a fast clip: the labour market is close to full employment, multinational exports are booming, the Government is running a surplus on foot of bumper tax receipts and while consumer spending is slowing, it isn’t expected to turn negative any time soon.
The ESRI expects modified domestic demand (MDD), the most accurate indicator of underlying domestic conditions, to grow by 7.5 per cent this year, before dialling back to 2.5 per cent in 2023. That’s a slowdown but not exactly a shock. Either we haven’t hit the true centre of the storm yet or perhaps it won’t be as bad as people are making out or the ESRI is furnishing us with an unusually upbeat outlook.
The think tank does pepper its commentary with caveats. “The outlook is decidedly uncertain and elevated cost-of-living pressures are likely to exert downward pressure on key areas of growth such as consumption,” it says. Only on the metric of inflation does the report see a major reversal. It is now forecasting inflation of 8.1 per cent in 2022 and 6.8 per cent in 2023, a stark upward revision on previous forecasts.
Despite the significant measures announced in the recent budget these levels of price growth will depress real wages, resulting in the biggest decline in living standards here since the financial crisis. On the basis of the ESRI’s current inflation projections and with wages growing by an average of 4 per cent, real wages will decline by 4.1 per cent this year and close to 3 per cent next year. Combined with the expected jump in interest rates and the knock-on rise in mortgage repayments, this is going to place real financial strain on households here.
But for now the ESRI is predicting we won’t get a recession.