Government cuts economic growth forecast due to inflation

The government has cut its growth forecast for 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 the time of the Budget, Modified Domestic Demand was forecast to grow this year by 6.5%.

Inflation forecasts have also been increased to an average of 6.25% this year, peaking at 6.75% in the second quarter.

However, in an alternative scenario in which oil and gas prices rise further, inflation would peak at 9.25% in the third quarter and average 8.25% for the full year.

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

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

The Department of Finance publishes economic forecasts twice a year.

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

Public finances, however, have improved dramatically.

The department now forecasts a much smaller deficit this year of €2bn, or –0.8% of GNI*, compared to last October’s forecast of a deficit of €8.3bn, or –3.4% of GNI. INB*, this year.

It now also forecasts a small surplus of €1.2bn (0.5% of GNI*) next year.

The SPU points out, however, that the cost of borrowing for the State has increased by 1% in the last two months and is now on an ‘upward trajectory’ as central banks withdraw from the support they have been providing, which allowed governments to borrow cheaply.

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

The document also warns that the costs of aging “will be binding” in the coming years and estimates that maintaining existing service levels with an older population will cost an additional €7 billion in current 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 considerable”.

The estimated costs associated with helping Ukrainian immigrants have been factored into the forecasts.

“Higher inflation will inevitably have an impact on household purchasing power…despite this, the headwinds we face today are expected to slow, but not derail, economic growth,” the finance minister said. Paschal Donohoe.

Minister for Public Expenditure and Reform Michael McGrath said the government recognized the price pressures on households and €1bn worth of measures had now been taken to help mitigate them.

He also said that the SPU includes a provision of 3 billion euros to provide funds to address the Ukraine crisis “… without affecting the amounts of basic expenses for the provision of public services and the NDP.”

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