It is impossible to forecast with any precision the economic impact of the war in Ukraine, due to the uncertainty about how events will play out. But it is important to start to get to grips with the possibilities to guide policymakers and also businesses and the public. So the Economic and Social Research Institute (ESRI) has provided a useful service in publishing updated economic forecasts, factoring in the war's impact and outlining potential scenarios.
Not surprisingly, the most striking aspect of this is the updated inflation forecasts, with consumer price inflation expected to average close to 7 per cent this year, driven largely by higher energy prices but now quickly spreading. From a position where inflation was expected to peak early this year before falling off quickly, a prolonged period of price pressures is now anticipated, with major implications for the cost of living.
As a result, consumer purchasing power will be reduced. The main engines of growth – consumer spending, business investment and exports – will increase more slowly. For now, the ESRI anticipates that the economy will continue to grow, with domestic demand increasing by 5 per cent and unemployment falling.
However, the report outlines a host of risk factors, including a prolonged conflict, disruptions to energy supplies, upended supply chains and even higher inflation leading to more rapid interest rate increases. In short, there remains a risk that the European economy could be knocked back into a recession, or something close to it. One of the most significant risks is of energy shortages and the need to ration power next winter.
It is a precarious position for policymakers. The Government benefits from the backdrop of a stronger-than-anticipated economic bounceback from Covid restrictions. But our national debt level is high and while funding costs remain low, they are now firmly on the rise. There is enough leeway in the budget for this year to fund the influx of refugees and to weather a likely slowdown in growth. However it will not be possible – or wise – to try to buffer everybody from the impact of higher energy costs.
In an interesting analysis published with the quarterly bulletin, ESRI researchers point out that most of the cost of the Government measures to date have gone towards supporting middle and higher earners, even though they have also supported the less well-off. The institute’s suggestion that the Government focus more forensically on supporting lower-income households should be heeded.
It is a testing outlook for policymakers. The key message is that the war will cost Ireland economically and this means prioritising where to spend will become even more important. The economic cost of war will mean fewer resources are available. They need to be spent wisely.