DUBLIN — Ireland expects the impact of the war in Ukraine to slow rather than stop economic expansion this year, the finance ministry said on Wednesday, after cutting its growth forecast and hiking its inflation projections.
The ministry expects modified domestic demand (MDD), its preferred measure of the health of the economy, to expand by 4.2% this year. That is down from a 6.5% expansion last year and the growth of 6.5% it had forecast for 2022 six months ago.
The slowdown is mainly due to its expectation households will respond to rapidly climbing inflation by spending 4.5% less than they would otherwise have by the end of 2023.
The ministry sees inflation averaging 6.2% this year, almost three times the rate it expected in its last set of forecasts six months ago, before falling to 3% next year and 2.2% in 2024.
Under a scenario where oil and gas prices are 50% and 75% higher than forecast, inflation would jump by an additional two percentage points this year, peaking at 9.25% in the third quarter and weigh on consumer spending.
That would in turn knock two percentage points off MDD growth over the course of 2022 and 2023 but unlike many other European economies, Ireland’s would avoid recession as an elevated savings rate provides an additional buffer.
Provided a more severe slowdown is avoided, Ireland’s budget deficit is expected to narrow at a faster than expected rate to 0.8% of gross national income this year following a surge in tax receipts, and return to a surplus of 0.5% in 2023.
Tax revenue is forecast to rise by 11% this year, including a 10% jump in corporate tax receipts. Even including the impact of the proposed change to global corporate tax rules, receipts in the multinational hub of Ireland are set to keep rising.
The finance ministry expects to collect almost 12 billion euros ($13 billion) or 20% more in corporate tax over the next four years than it did when it published its last forecasts in October, shortly after Dublin dropped its opposition to the global tax overhaul.
The 2023 figures include a new provision of 3 billion euros to fund thousands of Ukrainian refugees arriving in the country every week.
The ministry said the risks to all its forecasts were firmly tilted to the downside. ($1 = 0.9195 euros) (Reporting by Padraic Halpin Editing by Mark Potter and Barbara Lewis)