Ibec slashes enlargement forecasts for Irish financial system in face of Ukraine disaster

Ibec has slashed its growth forecasts for the Irish economy on the back of Russia’s invasion of Ukraine and on the ongoing energy price shock.

The employers’ lobby group said it was now expecting the economy to grow by 4.3 per cent this year, down from a previous forecast of 6.1 per cent.

In its latest quarterly assessment, it warned that surging prices would dampen consumer spending while making firms defer or re-evaluate their investment plans.

For households, it said it expected consumer price inflation this year to average roughly 6 per cent for the full year, up from a forecasts of 3.3 per cent as recently as December.

Ireland’s cost-of-living squeeze intensified last month with inflation surging to a 22-year high of 6.7 per cent, but headline price growth is expected to rise to over 8 per cent in the coming months.

While noting that Irish households held record levels of savings – up €30 billion since the start of the pandemic – the impact of these additional funds is now expected to be more muted.

“This will happen as the value of savings are eroded by inflation, households become more cautious and more of the savings are used to buffer against rising costs,” Ibec said.

Price surge

The organization also warned that measures aimed at helping households weather the current price surge would have to be more targeted “if we are to avoid adding fuel to the inflationary fire”.

“At the same time, premature or misjudged monetary policy reactions could trigger an unnecessary economic contraction,” it said.

The European Central Bank has signaled a possible interest rate rise to contain inflation “some time” after its bond-buying program in the third quarter of 2022 but Frankfurt is also worried about the potential negative impact of higher rates on headline growth.

“Despite the downward revision in our forecasts, it is important to acknowledge that our underlying business model remains strong and can deliver growth,” Ibec’s chief economist Gerard Brady said.

“However, the global environment will drag on growth this year and next, with rising energy costs, record commodity and transport costs and global supply chain challenges resulting in a slowing of business investment and lower than previously expected consumer spending,” he said.

“Even if inflation growth slows, the level of energy, transport and commodity prices will now remain much higher for longer,” Mr Brady said.

Heightened inflationary pressure combined with the worsening crisis in Ukraine were also cited as the reason for another drop in Irish business and consumer sentiment this month, according to the Bank of Ireland.

The lender’s latest “Economic Pulse” index, which tracks business and consumer sentiment, fell three points to 81 in April, the second consecutive monthly drop.

‘Fraught geopolitical situation’

The uncertain environment was making households warier about spending while tempering the expansion plans of firms, the bank said.

“The fraught geopolitical situation is continuing to impact sentiment, with the Economic Pulse down for a second month running in April,” the bank’s chief economist Loretta O’Sullivan said.

“The fallout from the war in Ukraine – increased uncertainty, higher global energy and non-energy commodity prices, and the spill-over effects of the sanctions on Russia to growth in our trading partners – will dampen economic activity in Ireland this year,” she said.

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