The latest forecasts from the Central Bank and the Economic and Social Research Institute (ESRI) paint a broadly similar picture. The economy has shown significant resilience through Covid-19 and the early months of the energy crisis, but slower growth is expected heading into 2023.
A recession cannot be ruled out, but is not seen as the most likely outcome. Both organisations underline the huge uncertainty surrounding their forecasts. The latest exchequer figures, published earlier this week, back up the analysis that so far the economy has shown what the ESRI referred to as “an extraordinary degree of resilience”. As well as the ongoing surge in corporation tax, income tax also remains strong and VAT receipts are well above pre-pandemic levels, showing that consumer spending remains relatively robust.
As higher energy bills land over the winter, consumers are likely to become more cautious, despite the support from budget measures. The ESRI also warns that house prices are now overvalued and so could be vulnerable. Businesses face a difficult period, too. Should it be necessary, the exchequer will have enough resources to repeat or extend for a period the temporary supports announced in the budget. The Central Bank points out that real earnings are set to fall on average for the first time since the financial crash; meanwhile, welfare recipients, while protected this year and in early 2023 by once-off measures, will remain under pressure if energy prices remain high.
As well as its far-reaching political and humanitarian importance, the unpredictable course of the war in Ukraine continues to hang over the economic outlook. The chief conduit for this is the price of energy and particularly of gas. The wholesale price of gas has moderated somewhat, though it remains well above pre-war levels. Warnings continue, however, of possible power shortages over the winter, depending not only on the war but on the more prosaic question of how cold the European winter will be. This is obviously a big issue for households, but it also matters for the wider economy.
The outlook presents the Government with a difficult mixture of short- and long-term factors. The budget should protect less well-off households for now, though questions remain about how to do so next year and beyond. On energy security for the winter, the Government has been left scrambling, relying in large part on gas supplies from the UK. In the longer term a huge agenda lies ahead in underpinning energy security and in planning the route to sustainable energy in the future. A key challenge for the Government is to demonstrate that it is on top of these issues and has a clear strategy. This is a vital challenge socially, economically and politically.