Balanced policy response required to address inflationary challenges
Ibec, the group that represents Irish business, today published its latest Economic Outlook report (see attached below), forecasting economic growth of approximately 4.3% in the year ahead, a decrease from the 6.1% that was predicted for 2022 in Q4 2021. The revised forecasts come largely as a result of the economic impact from rising costs and supply chain challenges across the global economy, accelerated by the Russian invasion of Ukraine.
Speaking at the launch of the report, Ibec Chief Economist and Head of National Policy, Gerard Brady said: “Despite the downward revision in our forecasts, it is important to acknowledge that our underlying business model remains strong and can deliver growth. 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.
“Even if inflation growth slows, the level of energy, transport and commodity prices will now remain much higher for longer. The net impact of this in economic terms is both a relative price shock for consumers – reducing spending elsewhere – and the postponement and re-evaluation of investments in businesses and construction.
“We are already seeing the challenges of commodity inflation starting to hurt our capacity to deliver much needed housing and infrastructure. It is vital that Government works with industry to ensure that contracts are adaptable to the challenges of inflation and that it remains viable for much needed infrastructure projects to continue to address the multiple quality of life and sustainability issues the country faces.
“This coming year will be a tight balancing act for policymakers globally. Measures to support households and businesses must be tightly 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.
“Ibec is calling on Government to intensify work through the Labour Employer Economic Forum to ensure better coordination and targeting of tax, social welfare and other labour market policies that can address inflationary pressures.”
The key findings of the latest Ibec Economic Outlook report include:
- The economic impact from the Russian invasion of Ukraine will knock somewhere between 1-2 percentage points off the rate of growth relative to the 6.1% we expected for 2022 in Q4 2021. Economic growth will still be positive at around 4.3% in the year ahead.
- For households, our expectation is that consumer price inflation this year will run at around 6.1% for the full year and increase from a 3.3% expectation in our Q4 2021 outlook.
- Irish households come into this period with record savings. At its peak during the first half of 2021, Irish household savings were rising by over 17% annually. Whilst the re-opening of the economy in the early part of 2022 has seen some slowdown in the rate of deposit growth (to 9% annually), we have yet to see significant drawdown on existing savings. At the end of February 2022 Irish household deposits had risen by €30 billion on the same month in 2020, to over €142 billion, or €28,000 per person.
- Consumer trends in the opening quarter of the year emphasised the strong momentum underlying the Irish economy as we entered 2022. Retail sales in January and February were up 12%, in volume terms, on the same period in 2019 – showing the strength of the retail recovery.
- Rising energy prices will introduce a relative price shock to consumer spending. This is where households when faced with higher spending on energy bills cut back on consumption elsewhere. Overall consumption remains unchanged but other sectors of the economy – particularly those reliant on discretionary spending lose out.