Govt cuts economic growth forecast due to inflation

The Government has cut its forecast for growth in the economy by 2.25 percentage points to 4.25% as a result of higher inflation and the negative impact of the war in Ukraine.

At Budget time, Modified Domestic Demand had been forecast to grow this year by 6.5%.

Forecasts for inflation have also been increased to an average 6.25% this year, peaking at 6.75% in the second quarter.

However, under an alternative scenario where oil and gas prices go even higher, inflation would peak at 9.25% in the third quarter and average at 8.25% for the year as a whole.

Inflation had been forecast at Budget time to average 2.2% this year.

The latest forecasts are contained in the Stability Programme Update (SPU), published this afternoon.

The Department of Finance publishes economic forecasts twice a year.

The next set of forecasts will be published on Budget Day in October.

The public finances, however, have improved dramatically.

The department is now forecasting a much smaller deficit this year of €2 billion, or – 0.8% of GNI*, compared to a forecast last October of a deficit of €8.3billion, or –3.4% of GNI*, this year.

It is now also forecasting a small surplus of €1.2 billion (0.5% GNI*) next year.

The SPU notes, however, that the cost to the State of borrowing has gone up by 1% in the past two months and is now on ‘a rising trajectory’ as central banks pull back from the support they have been giving which enabled governments to borrow cheaply.

Employment growth is expected to remain strong with forecasts predicting that unemployment will average 6.25% this year, falling to just over 5.5% at the end of this year.

The document also warns that ageing costs “will become binding” in the years ahead and estimates that maintaining existing levels of service with an older population will cost an additional €7 billion in today’s terms by the end of the decade.

The SPU states that the risks to the forecasts are “firmly tilted to the downside” and that the margin of error “is sizeable”.

The estimated costs associated with helping Ukrainian migrants has been taken into the forecasts.

“Higher inflation will inevitably impact on the purchasing power of households … despite this, the headwinds we face today are expected to delay –but not derail- economic growth,” said Minister for Finance Paschal Donohoe.

Minister for Public Expenditure and Reform Michael McGrath said the Government recognised the price pressures on households and that €1 billion worth of measures have now been taken to help mitigate them.

He also said the SPU includes a provision of €3 billion to provide funding to address the Ukrainian crisis “…while not impacting on the Core Expenditure amounts for delivery of public services and of the NDP”.

Article Source – Govt cuts economic growth forecast due to inflation – RTE – Robert Shortt

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