Economic projections unravel in face of Ukraine war and inflation

Growth forecasts for the Irish economy tend to chop and change. That’s because the economy is small, outward facing and heavily concentrated around two or three blockbuster industries – pharma, IT, agri-food.

Small, even local, changes can affect the outlook. In contrast, it takes a lot to shift the dial for global growth, a largely concocted measure that tries to account for activity across all countries and all sectors. The war in Ukraine and the rapid surge in inflation have, however, taken a wrecking ball to projections set just two months ago.

The International Monetary Fund (IMF) on Tuesday slashed its forecast for global growth, warning the conflict had led to extensive loss of life; triggered the biggest refugee crisis in Europe since the second World War; and severely set back the global recovery from Covid.

Downgrading its forecasts for the second time this year, the IMF said it was now projecting growth of 3.6 per cent this year and next, a drop of 0.8 and 0.2 percentage points respectively on its January forecast.

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The Washington-based agency also warned that the Ukraine conflict had further increased commodity prices and intensified supply disruptions, meaning inflation would remain higher for longer, and that central banks now faced a difficult and complicated trade-off between containing price pressures and safeguarding growth.

We now seem to be limping from crisis to crisis. Just three years ago, Ireland’s economic trajectory seemed pinned to the UK’s protracted divorce arrangements with the European Union. Those concerns were quickly swept away by the pandemic and a sequence of on-off lockdowns, a period we have yet to fully emerge from. The recent focus on inflation and the cost of living has merged – economically speaking – with the Ukraine crisis and the surge in commodity prices to produce a very uncertain outlook.

KBC Bank Ireland’s latest consumer sentiment charts a major deterioration in outlook among consumers here since the start of the year. The majority of Irish consumers now fear the economy will be weaker in 12 months’ time.