The Economic and Social Research Institute has lowered its forecasts for growth in the economy this year and increased its outlook for inflation as a result of the ongoing war in Ukraine.
In its latest Quarterly Economic Survey, the ESRI said inflation could peak at 8.5% this summer before averaging out across the year at 6.7%.
The average 6.7% inflation rate forecast for this year by the ESRI would be the highest annual rate since 1984.
The Russian invasion of Ukraine will have a negative impact on global economic activity and is making inflationary pressures, which were already building, even greater.
The ESRI also warns that its latest forecasts for the economy are highly uncertain with big downside risks due to the ongoing war.
It has pared back its forecast for growth in the economy this year to 6.2%.
But even given all of the uncertainty, the ESRI still believes there will be a small surplus in the public finances for the first time in three years.
However, inflation poses a serious problem with disposable incomes likely to fall on average by between 2-3% as wage increases are overtaken by higher prices.
It believes more measures to protect those on lower and fixed incomes may be necessary.
The think-tank also said that if the Government chooses to use it, the Covid contingency fund would provide some cushion against inflation and provide for humanitarian assistance to those fleeing the war in Ukraine.
The war in Ukraine has led the ESRI to reduce its forecasts for economic growth this year to 6.2% in GDP terms and 5% when measured by Modified Domestic Demand.
This compared to a forecast in its Winter Quarterly in December of 7% growth in GDP and 7.1% growth in MDD.
Inflation had been forecast to average at 4% this year, but that has been revised upwards to 6.7% with a possible peak of 8.5% in June or July.
However, ESRI Research Professor Kieran McQuinn cautioned that there is “a lot of uncertainty around those figures” and that inflation could prove to be “even more acute than that”.
The ESRI is forecasting a small surplus in the public finances of €1.1 billion, or 0.2% GDP, this year compared to a previously forecast deficit of €4.8 billion, or 1% GDP.
But Professor McQuinn said “there are significant downside risks for the public finances” if the need arises for further Government assistance to low-income groups or support for specific sectors of the economy, such as agriculture, which might be adversely affected by the ongoing war.
The report notes that only 6% of Ireland’s petroleum imports come from Russia, but it accounts for 67% of our coal imports and 26% of fertilisers.
It also notes a “reputational risk” from an estimated 70 firms registered in the IFSC holding €62 billion in assets with Russian connections.
But it said these are neither owned by Irish institutions or households.
It calculates the Irish financial system’s direct exposure to Russian lenders at under $2m, which it describes as “minimal”.
Speaking on RTÉ’s Morning Ireland, Professor McQuinn said that inflation pressures were expected to be temporary in light of the pandemic, but now recent events will “exacerbate” the pressures and will mean higher inflation for the rest of the year and possibly into 2023.
He said energy markets as well as commodity markets are affected and foodstuffs will increase in cost.
“Ukraine and Russia are amongst the largest producers of wheat in the global market, so this is all going to feed into, unfortunately, higher inflation really certainly for the rest of this year and probably well into 2023,” he cautioned.
Household consumption will be affected, and people will spend less on discretionary items, he added.
Mr McQuinn said the economy has come through the pandemic in a “relatively robust and resilient manner” and it is still expected to grow but ultimately the war in Ukraine will impact that growth.
The public finances are “in reasonably good order” and although there was significant borrowing in 2020 the strength of the economic performance has meant that all key fiscal indicators are on a sustainable trajectory again, he said.
The ESRI has recommended that any Government support measures be targeted to households that need them the most as “that’s the most effective way to alleviate the inflationary pressures”, he said.
If the inflationary pressures continue to build, and if they are more acute than expected then a mini-budget may be needed “but it inevitably will depend on the scale of the inflationary pressures in the economy ultimately”, he added.