Instability in the Middle East, renewed trade tension, and disruption to shipping and energy markets have lowered economic growth projections for the Republic by 0.5 per cent since the start of the year, according to KPMG.
The Big Four accounting firm said the State entered this year with “strong fundamentals” as employment touched a record high and headline inflation was on a downward trajectory at 2.8 per cent.
However, the external environment has “deteriorated materially” since the start of the year, it said, and growth for the full year may be in the 2-2.5 per cent range, down from an expectation of 2.5-3 per cent at the start of the year.
KPMG Ireland head economist Daragh McGreal said the global context has become much more hostile.
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“For a highly open economy, the issue is not whether shocks arrive, but how often and how severely they spill over, and how we respond to them as Ireland is a price taker in energy markets,” he said.
“Ireland is particularly exposed to global and European energy price movements. As a price taker with limited storage capacity and high import dependence, changes in wholesale gas and electricity prices feed rapidly into domestic costs for households and businesses.
“As of mid-April, energy prices are at 0.17/kW/h, the highest in Europe. Government measures … [only] partially cushion households and businesses from the worst effects of volatility.
“On a per-person basis, the value of Irish Government supports is 215 times greater than the value of UK government supports. Nonetheless, these interventions cannot insulate the economy indefinitely if wholesale prices rise again,” he said.
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While energy inflation has eased from its 2022-23 peak, energy prices remain “significantly above” pre-pandemic levels, and energy costs “continue to influence” transport, construction and service prices.
Early in the US-Israel-Iran conflict, there were heightened concerns that pre-pandemic interest rates would rise at least twice this year.
“For Ireland, where mortgage rates and business borrowing costs are highly sensitive to market expectations, this would be a material risk,” noted the report.
“If the ECB hikes interest rates by 0.5 per cent, then an average new first-time buyer could expect annual repayments to be €1,200 higher.”
Despite easing inflation, households continue to face high day-to-day costs. House purchases, rental costs, and grocery costs – all growing at 5-7 per cent – continue to grow faster than the headline inflation rate.
“While average earnings have risen strongly since pre-Covid by 25-30 per cent, cumulative price increases have also risen by similar levels,” stated the report.
“This means that gains feel limited for many households, particularly renters and first-time buyers. Consumer confidence remains more sensitive to interest rates and housing affordability rather than GDP [gross domestic product] growth.”
McGreal said the challenge facing the Republic is “no longer runaway inflation”, but instead a “permanently higher cost base”.
