Irish economic growth is expected to remain strong, but faces significant uncertainty due to the indirect effects of the war in Ukraine, the International Monetary Fund (IMF) has said.
In the latest health check of the country’s economy following its regular “Article IV mission” to the country, the IMF said energy and commodity prices are likely to push average inflation above above 6% this year, projected at 6.5% on average, before falling to 2.8% next year.
In a statement at the end of their two-week visit, the Washington DC-based fund said: “Covid support measures are being appropriately lifted in line with the economic recovery.”
In the short term, the government needs to find “two-way fiscal flexibility” to strike the right balance between supporting the economy and containing inflationary pressures.
“The economic outlook remains strong but risks are on the downside,” the fund said.
The IMF noted that “several pre-pandemic challenges remain, including an insufficient supply of housing” as well as gaps in infrastructure, social and green investments. It was also necessary to strengthen the internal links of multinational companies “to make growth more inclusive”.
“Over the medium term, more high-quality spending is needed to facilitate the transformation of the economy while preserving fiscal sustainability,” the fund said.
Economic growth in terms of gross domestic product rose an “impressive” 13.5% last year, largely driven by multinationals, surpassing pre-pandemic levels, the fund said.
Household consumption increased by 5.7%.
“Although direct financial and trade ties with Russia and Ukraine are weak, the impact of rising energy prices is substantial,” the IMF said.
As a result, real GDP growth is expected to decelerate to “a still robust rate” of 6% in 2022 and 5% in 2023.
“High energy and commodity prices, robust domestic demand and [a] tightening labor market are contributing to inflationary pressures,” the fund said.
Real GDP growth is expected to fall to 3% over the medium term, while inflation will gradually fall to 2% “as energy and commodity prices are expected to decline”.
“However, uncertainty is high and external risks are becoming more pressing, including from further supply chain disruptions, deteriorating external demand and confidence, and possible unforeseen financial sector exposures. sanctions,” the IMF said.
“There are also uncertainties, including the remaining details of corporate tax changes and the implementation of Brexit.”
The fund said the government’s fiscal policy must “strike the right balance between battling the headwinds of war in Ukraine and containing inflationary pressures.”
He advised the government to end preferential VAT rates and gradually increase “very low” property tax rates “while ensuring adequate social guarantees”.
The IMF said the financial sector had weathered the pandemic crisis well and remained resilient, but there was still a need to address the “legacy scarring effects” of the 2008 financial crisis, address the factors leading to high interest rates on loans and strengthening the growing financial sector. .
“Further structural reforms should aim to remove bottlenecks, raise productivity and reduce remaining inequalities,” the fund said.
Responding to the IMF’s final statement, Finance Minister Paschal Donohoe said the country faced a “new set of complex and interrelated challenges”.
“Supply issues resulting from the pandemic have already contributed to higher inflation which has been compounded by the impact of the war in Ukraine and the resulting increases in energy and commodity prices,” did he declare.
As the government continued to provide targeted support to households, it said resources were “limited” and fiscal policy “must be carefully balanced to avoid further inflationary pressures and a harmful wage-price spiral”.
Public Expenditure and Reform Minister Michael McGrath said the economy “faces a new set of challenges with the rising cost of living and the war in Ukraine”.
The engagement with the IMF on the challenge of supporting the economy while containing inflationary pressures – an issue facing many countries – was “appreciated”, he said.
The IMF will publish a more detailed analysis of the Irish economy and financial sector in its full ‘Article IV’ report in early July.