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Cost of Living

Disposable incomes to fall for the first time since 2012 amid rampant inflation, economists say

The combined impact of higher prices and greater uncertainty in global trade from the war in Ukraine is likely to weaken Irish growth this year.

LAST UPDATE | 23 Mar 2022

DISPOSABLE HOUSEHOLD INCOMES in Ireland are expected to fall this year in real terms for the first time in a decade with consumer prices increasing at their fastest pace since the early 1980s against the backdrop of the war in Ukraine.

Annual inflation is expected to be considerably higher than expected and well above the European Central Bank’s 2% annual target this year, according to the Economic and Social Research Institute’s (ESRI’s) first set of forecasts since Russia’s invasion.

Having previously pencilled in consumer price inflation of 4% this year, the Dublin-based think-tank now expects prices to grow by an average of 6.7% in 2022.

The Government has already outlined a package of measures aimed at insulating households from sharply rising prices, particularly energy bills, given Russia’s crucial position within global natural gas and oil markets.

When this package — including the €200 energy bill credit, increases to the fuel allowance, the expansion of the Working Family Payment among measures — is factored in, disposable household incomes are expected to grow by 4.8% this year.

However, this is below the ESRI’s 6.7% inflation forecast for 2022.

“In other words, we expect disposable incomes to – on average – fall in real terms,” according to the think-tank’s analysis, for the first time since 2012.

ESRI economists have also downwardly revised their outlook for Irish growth, investment and employment – a consequence of the “significant uncertainty” arising from the war in Ukraine — in its first set of forecasts since the Russian invasion in late February.

“While Ireland’s direct trade exposure to both Russian and Ukrainian markets is limited, it is clear that these events will have an impact on the domestic outlook,” the authors of the ESRI’s latest Quarterly Economic Commentary said in the report, published this morning. 

The “rapid deterioration” of relations between Western states and Russia is likely to exacerbate already existing inflationary pressures within the Irish economy.

Inflation is likely to accelerate as the brutal Russian invasion of Ukraine continues to disrupt global ties — including energy markets and food supply chains — the ESRI said.

Those effects are likely to be compounded if sanctions are intensified.

The economists said, “If Western authorities decide, for example, to reduce European consumption of Russian gas, this would almost inevitably lead to higher energy bills over the short- to medium-term.”

“As a small, open and highly globalised economy, the greatest impact on the Irish economy will come through any general reduction in international trade,” the report highlights.

Lower growth

The Irish economy and the public finances came into 2022 in a very strong position, having recovered significantly throughout the course of last year.

Irish Gross Domestic Product (GDP)  and Modified Domestic Demand (MDD) — a measure of indigenous economic output that strips out the distorting impact of multinationals and the aircraft leasing sector — both grew considerably in 2021, by 12.5% and 6.5%, respectively.

Lower than targeted Government spending in 2021 along with strong underlying growth in taxation receipts has had a positive impact on the public finances.

However, the combined impact of higher prices and greater uncertainty in global trade is likely to weaken growth this year compared to previous forecasts, according to the report.

Although GDP is still expected to grow robustly by 7% in 2022, this represents a downgrade from the ESRI’s last set of forecasts, which pencilled in growth of 6.2% this year.

Modified domestic demand (MDD) — is also expected to grow by 5%.

However, the outlook has darkened from December when the ESRI forecast MDD growth of 7.1%. 

On domestic employment, the ESRI said that unemployment is set to average at 6.3% in 2022 — higher than the previous forecast of 5.8%.

“We expect unemployment to reach 4.5% by Q4 2023 and average 4.8% for the year.”

One of the authors of the report, Professor Kieran McQuinn of the ESRI said, “While the outlook for the Irish economy is still positive in 2022 and 2023, the impact of the Russian invasion of Ukraine will lower the expected growth rate of the Irish economy and lead to higher rates of domestic inflation”.

His co-author, Conor O’Toole, added, “The Irish economy entered 2022 showing all the signs of a robust recovery from the pandemic.

“However, the fast-changing global economic and geopolitical context points towards a worsening economic outlook with numerous headwinds.”

Speaking in Versailles earlier this month, Finance Minister and President of the Eurogroup Paschal Donohoe said that he expected the Irish and Eurozone economies to grow this year.

“Our expectation is that the economy of the Eurozone will grow. It will grow at a pace that is different, slower to what we would have anticipated.”

“We came into these extraordinary challenges with a recovery of real momentum with virtually every economy in the euro area due to get back to the pre-pandemic levels of growth by the end of this year. We approach this terrible moment with a level of unemployment at a historic low.

“So we have a very high level of momentum going into this terrible challenge. So while the uncertainty is still high, I do still expect the economy to grow,” he said.

In January, the chief economist of the European Central Bank, Philip Lane said that the “pandemic cycle” of inflation would ease this year and that the 5% inflation rate at the time would come down.

With reporting from Gráinne Ní Aodha.

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