The European Union will tip into recession this winter due to the fallout of the invasion of Ukraine, with high energy prices hammering people’s spending power and deep uncertainty over future risks, the European Commission has forecast.
Ireland may escape the worst, however, with multinational exports expected to remain strong and drive growth, while unemployment remains low.
Nevertheless, the forecast said there was strong uncertainty for Irish economic growth because exports are concentrated in a few sectors and companies.
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“Risks to the fiscal outlook are tilted to the downside. The current very high intake of corporate taxes may be temporary and thus also entails downward risks for Irish public finances,” it said.
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“Ireland’s high concentration of exports in a few fields and companies may continue to cause volatility in the country’s economic growth figures.”
The forecast said most member states and the EU as a whole would experience a “technical recession” this winter before growth returns in the spring.
EU GDP is expected to contract by 0.5 per cent in the last quarter of 2022 and by 0.1 per cent in the first quarter next year, compared with the previous quarters. No quarterly forecast was available for Ireland. Overall, stagnation and high inflation are expected for the EU in 2023.
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“We are approaching the end of a year in which Russia has cast the dark shadow of war across our Continent once again,” the economy commissioner Paolo Gentiloni said in a statement.
“The EU economy has shown great resilience to the shock waves this has caused ... yet soaring energy prices and rampant inflation are now taking their toll and we face a very challenging period both socially and economically,” he continued, warning that the forecast was subject to “multiple risks and uncertainties”.
Helped by a strong post-pandemic rebound earlier this year, Ireland’s overall growth for 2022 is forecast to be a relatively strong 7.9 per cent, before slowing to 3.2 per cent in 2023 and 3.1 per cent in 2024.
Labour markets are nevertheless forecast to remain strong, with Ireland’s unemployment rate set to increase just slightly from 4.4 per cent in 2022 to 4.8 per cent next year and 5 per cent in 2023.
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Consumer price inflation is expected to be lower in Ireland than the EU average at 8.3 per cent this year before dropping to 6 per cent in 2022 and 2.8 per cent in 2023, significantly below the rates of EU countries nearer to Russia where rates have neared 20 per cent this year.
“Exports, notably of multinational corporations producing medical devices, pharmaceuticals and those providing information and communication services, remain the driving force behind Ireland’s very strong economic growth,” the forecast read.
“These sectors are generally expected to remain resilient and supply difficulties have reportedly diminished.”
The number of people employed in Ireland reached a historical record of 2.55 million people in the second quarter of this year, it read. It did not forecast that the recent round of lay-offs in the tech sector in Ireland would become a more structural issue.
“Employment is expected to keep increasing but at a moderating pace, in line with the projected slowdown in economic activity,” the forecast read.
“Generally, the financial situation of Irish households remains solid, with the unemployment rate at historic lows and wages rising, albeit more slowly than inflation.”
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The new forecast predicted that inflation would peak at 9.3 per cent overall in the EU this year before slowing to a still-high 7 per cent next year, and 3 per cent in 2024.
The forecast warned that the economic outlook was subject to an “exceptional degree of uncertainty” due to the continuing war, and that there could well be further economic disruption.
It warned of “potential disorderly adjustments on global financial markets” as higher interest rates bite, as well as the risk that inflation could last longer than currently forecast.
The greatest threat is the risk of gas shortages, particularly in the winter of 2023 to 2024, according to the forecast. It also said the EU is “exposed to further shocks to other commodity markets reverberating from geopolitical tensions”.
