Irish households are facing the largest decline in living standards since the financial crisis in 2008 as earnings do not keep pace with rising inflation, the Economic and Social Research Institute (ESRI) has warned. The institute also predicts a possible slowdown in house price growth due to rising interest rates.
In its latest summer commentary, ESRI said that the Irish economy continued to perform strongly and would grow at a rate of 6.8 percent in gross domestic product (GDP) this year and by 4.8 percent in 2023 due to strong exports from the multinational sector.
However, it said that the persistent rise in inflation and uncertainty due to the war in Ukraine would erode the performance of the domestic economy.
With inflation expected to average over 7 percent this year and incomes expected to grow by just 3.5 percent, real incomes will decline by up to 4 percent, said ESRI, representing the largest decline in living standards since the period 2008-2009 when the economy imploded in the face of a global credit crunch.
The expected rise in interest rates – the European Central Bank has signaled a sequence of interest rate hikes from next month – is also likely to dampen investment sentiment, consumer consumption and growth in property prices.
While ESRI expects population growth and supply constraints to continue to support house prices in the short term, it estimates that in the absence of these factors, a half-point rate hike would trigger a 2% decline in values, with a greater impact if people believed further interest rate hikes were on the way.
To date, consumption expenditure, the largest component of domestic demand, has remained strong in the face of current pressures on the cost of living. But as household bills rise and pandemic savings go down, this could change quickly, ESRI warned.
“Policymakers must be particularly focused on the difficulties posed by the high inflation rate; There is still some financial scope to help those most hard hit by higher living costs, but this must be done in a targeted way, it says. The think tank said that high taxes and strong growth would give a budget surplus this year of about 1.6 billion euros, significantly more than previously anticipated, which gives the government some fiscal policy space for cost-of-living measures in the budget.
Salary price spiral
ESRI also assessed the likelihood of a wage-price spiral developing in the Irish economy as a result of the current increase in the cost of living.
It forecast that although the average annual wage increase of 3.5 percent this year and 4.5 percent in 2023 was strong over the past 10 years, it was significantly lower than inflation. However, it noted that if unemployment fell below 4%, “this would be historically low in an Irish context and could result in a further escalation of wage levels”.
Despite a strong recovery from the Covid-19 pandemic, the domestic economy faces significant downside risks, none greater than Russia’s military invasion of Ukraine, which has triggered a humanitarian catastrophe and amplified a number of pre-existing macroeconomic risks.
“The acceleration in food and energy prices caused by the current war has further increased inflationary pressures, with an impact on basic food and energy for low-income households and poor countries that are particularly acute,” it said.
At the same time, the UK government continues to add uncertainty to ongoing Brexit negotiations “through its unilateral legislative measures to amend the Northern Ireland Protocol”, ESRI said, noting the ongoing poor development of the UK economy as a major export destination. for Ireland posed a risk in itself.
Separate figures from the Central Statistics Office published on Wednesday showed that the price of goods leaving the factory gates – wholesale prices – rose at an annual rate of 7.3 percent in May, reflecting the increase in input costs throughout the economy.
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