Soaring energy prices will result in a drop in the purchasing power of households and slower economic activity, the Central Bank has warned.
In its latest quarterly bulletin, the bank revised upwards its consumer price inflation forecast for this year to 8%, along with a predicted 6.4% annual growth in the economy.
It said that the economy grew strongly in the first half of the year, but is expected to “slow sharply” for the remainder of 2022.
The bank is forecasting economic growth of 2.3% in 2023, while the rate of inflation will be around 6.3%.
It noted that the economic outlook over the coming quarters is more challenging than previously expected due to energy-driven inflation.
Based on current market expectations, the bank said headline inflation will ease from the final quarter of this year.
However, a period of “below-trend economic growth” could still be possible into 2024.
“Inflation is expected to moderate to below 3% over 2024, albeit that fossil fuel prices may stay elevated over the medium term.
“While energy price inflation is expected to ease significantly over the forecast horizon, it is not expected that energy price levels will fall to any great
extent,” it said.
The bank said that higher consumer prices and business costs are creating a “drag” on household spending and business investment.
Average household real disposable income is expected to decline by 3.3% this year.
It warned that the economic outlook remains “highly uncertain” as forecasts are based on current market expectations around energy prices.
In particular, natural gas price developments since July underline the uncertainty around the economic forecast.
“With the supply-side already experiencing constraints during the transition out of the pandemic, the economic implication of the Russian invasion of Ukraine is
one of a large supply-side shock to the Irish and European economies.
“The economy’s adjustment to this supply-side shock will be shaped by policy
choices and the ability of businesses and households to manage higher costs.
“While affecting everyone, energy and food price inflation is more acutely felt by some households than others.”
Around 15% of all households with lower incomes, larger expenditures on food and energy and limited savings are particularly vulnerable to the current inflationary environment.
As Ireland is a net energy importer, the bank said that the immediate costs of the external economic shocks are “largely unavoidable”.
Over half of the measures in Budget 2023, the bank said, appear to be untargeted and could add to inflation in the medium-term, but this would be negligible compared to other drivers such as energy.
The Central Bank advised that government policy should focus on enhancing the resilience of the economy to future shocks.
It also highlighted the over-reliance on corporation tax income from a small number of multinational companies which it described as “an ongoing source of vulnerability to the public finances”.
A decision to transfer €2 billion to the National Reserve Fund in 2022 and a planned €4 billion in 2023 is seen as a positive development.
“It remains important to maintain a domestic policy stance that sustainably and credibly supports both near and medium-term objectives in the areas of housing, as well as the green and demographic transitions,” the bank stated.