Higher oil and gas prices will lead to lower growth and higher inflation in Ireland, the Central Bank of Ireland and the Economic & Social Research Institute (ESRI) both warn in their latest quarterly assessments.
The ESRI predicts inflation averaging 3.2 per cent this year, up from a previous forecast of 2.1 per cent.
The Central Bank forecasts it at a more modest 2.9 per cent, but at more than 4 per cent in the event of a more prolonged shock to energy prices. The regulator also noted its forecast doesn’t factor in the potential shock to non-energy prices.
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In an interview with the BBC on Wednesday, Larry Fink, chief executive of the world’s largest asset manager, BlackRock, put forward two possible scenarios: one with Iran being integrated back into the global economy and oil prices returning to $40 a barrel; and the other with oil soaring above $150 and the global economy sliding into recession.
There was no possibility of landing in the middle of these two scenarios, he said; it would be one or the other.
Forecasting in such a fluid environment is a slippery business.
Both institutions took issue with the Government’s move to cut excise duty on fuel which they described as “untargeted”. The ESRI’s Alan Barrett was more pointed, noting that about 50 per cent of the cost of cutting indirect taxes on energy would go to the top 40 per cent of households.
If the Government had designed a policy to give 50 per cent of the Apple tax windfall to the top 40 per cent of households it would be viewed as “strange”, Barrett said.
The takeaway from the Central Bank and the ESRI assessments is that, even if it stops tomorrow, the Iran crisis will have a lasting impact on prices and growth here. The duration of the conflict will simply determine by how much.
Ireland is more exposed to energy price shocks than others because of its reliance on imported gas, its dispersed population and the huge outlay it is planning to build out infrastructure.
If the current energy price spike feeds into construction inflation, the ESRI warned it would pose a further risk to Government housing targets.
Ultimately, while both institutions had much to say about the fallout from the crisis, it all comes down to, as the late Donald Rumsfeld might have said, a known unknown: the duration of the conflict.
