Irish economic growth is projected to remain strong, but faces substantial uncertainty due to the indirect effects from the war in Ukraine, the International Monetary Fund (IMF) has said.
In the latest health check on the country’s economy following its regular ‘Article IV mission’ to the country, the IMF said that energy and commodity prices would likely push average inflation above 6 per cent this year, projected to average 6.5 per cent, before falling to 2.8 per cent next year.
In a statement at the end of their two-week visit, the Washington DC-based fund said: “Covid-support measures are being appropriately unwound in line with the economic recovery.”
In the short term, the Government must find “two-way fiscal flexibility” to strike the right balance between supporting the economy and containing inflationary pressures.
“The economic outlook remains strong but risks are tilted to the downside,” said the fund.
The IMF noted that “several pre-pandemic challenges remain, including insufficient supply of housing” along with gaps in infrastructure, social and green investments. There also needed be stronger inward links from multinational companies “to make growth more inclusive.”
“In the medium term, more high-quality spending is needed to facilitate the transformation of the economy while at the same time safeguarding fiscal sustainability,” the fund said.
Economic growth in terms of gross domestic product grew by an “impressive” 13.5 per cent last year, largely driven by multinationals, surpassing the pre-pandemic level, said the fund.
Household consumption increased by 5.7 per cent.
“While direct financial and trade links with Russian and Ukraine are small, the impact of energy price increases is substantial,” the IMF said.
As a result, real GDP growth is projected to decelerate to “a still robust” 6 per cent in 2022 and 5 per cent in 2023.
“High energy and commodity prices, robust domestic demand and [a] tightening labour market are contributing to inflationary pressures,” the fund said.
Real GDP growth is projected to decline to 3 per cent over the medium term while inflation gradually declines to 2 per cent “as energy and commodity prices are envisaged to subside.”
“However, uncertainty is high and external risks are becoming more pressing, including from further supply-chain disruptions, a worsening of external demand and confidence and possible unanticipated financial sector exposures to sanctions,” said the IMF.
“There are also uncertainties including the remaining details of corporate income tax changes and Brexit implementation.”
The fund said the Government’s fiscal policy needs “to strike a fine balance between countering the headwinds from the war in Ukraine and containing inflationary pressures.”
It advised the Government to end preferential VAT rates and gradually increase “very low” property tax rates “while ensuring adequate social safeguards.”
The IMF said the financial sector had weathered the pandemic crisis well and remained resilient but there was still a need to address “legacy scarring effects” of the 2008 financial crisis, to tackle factors leading to high lending interest rates and to strengthen the growing financial sector.
“Further structural reforms should aim to remove bottlenecks, increase productivity and reduce remaining inequities,” said the fund.
Responding to the IMF's concluding statement, Minister for Finance Paschal Donohoe said the country was faced with a "new set of complex and inter-related challenges".
“Supply issues arising from the pandemic already contributed to higher inflation which has been added to by the impact of the war in Ukraine and the resultant energy and commodity price increases,” he said.
While the Government was continuing to provide targeted support to households, he said that resources were “limited” and that fiscal policy “must be carefully balanced to avoid further inflationary pressures and a harmful wage-price spiral.”
Minister for Public Expenditure and Reform Michael McGrath said the economy “faces a new set of challenges with the rise in the cost of living and the war in Ukraine.”
Engagement with the IMF on the challenge of supporting the economy while containing inflationary pressures - an issue facing many countries - was “valued,” he said.
The IMF will publish a more detailed analysis of the Irish economy and financial sector in its full ‘Article IV’ report in early July.