Economic consequences of invasion of Ukraine sees consumer prices increase, continuing supply chain disruption

The Irish economy experienced a robust recovery in 2021 due in large part to an easing of public health restrictions, a recovery in consumer demand, and strong export activity. GDP and Modified Domestic Demand (MDD) grew by 12.5 per cent and 6.5 per cent, respectively. However, a number of challenges are likely to impact further growth in the year ahead. Most notably, Russia’s invasion of Ukraine will have significant impacts on the global economy. Increases in consumer prices are likely to accelerate as the conflict disrupts energy markets. As a consequence of higher prices and greater uncertainty in global trade and investment, we expect GDP and MDD to be lower in 2022 than previously forecast. At present, we anticipate GDP to increase 6.2 per cent in 2022, with modified domestic demand growing 5.0 per cent over the same period.

Inflationary pressures, which had already been mounting in the latter half of 2021 due to supply chain problems and a rapid recovery in consumption, is likely to intensify as a consequence of the invasion of Ukraine. Economic sanctions imposed on Russia and disruptions to supply are likely to persist and feed into consumer prices. Given these uncertainties, we now anticipate average inflation of 6.7 per cent in 2022 and 5.0 per cent in 2023.   

With the lifting of public health measures and an end to pandemic related supports, we anticipate further improvements in the unemployment rate. Unemployment is set to average 6.3 per cent in 2022 and fall further throughout 2023. We expect unemployment to reach 4.5 per cent by Q4 2023 and average 4.8 per cent for the year.

Lower than targeted spending in 2021 along with strong underlying growth in taxation receipts has had a positive impact on the public finances. However, a number of significant risks associated with the Ukrainian crisis may adversely impact the public finances.

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

Commenting on the report, author Conor O’Toole of the ESRI stated: “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.”