Prices of goods and services in Ireland are on the brink of surging by nearly 10 per cent as a result of Vladimir Putin's invasion of Ukraine, AIB chief economist Oliver Mangan has warned.
People can expect a damaging hit to their disposable income “before too long”, as wage increases will not match the unexpected inflation hikes, which could lash consumers over the next three years, he predicted.
“We could see inflation rates of 8 or 9 per cent before too long,” Mr Mangan said.
“You would have been carted out of a room in a white coat if you had predicted that a couple of years ago.”
Speaking at a post-Brexit cross-border conference, organised by Newry and Dundalk Chambers, Mr Mangan said it was a "strange time to say the least" for the Irish economy.
Having coped with the fallout of Brexit, then the Covid pandemic, the Russian onslaught on Ukraine has heaped “a lot of economic uncertainty” for the near future, he cautioned.
While there was a "far greater than anticipated" rebound in the economy last year - a 6.5 per cent growth in Ireland's domestic market - as Covid restrictions eased and unemployment nose-dived, the war in Europe has "put the cat among the pigeons".
Negative impact
Despite a “good start to the year” economically, with the country set up for strong growth, there was “no doubt” now of a “negative impact on economic activity going forward,” he added.
“We did expect inflation to rise - but nowhere to the extent that has transpired,” he said.
Much of the uncertainty is driven by a dearth of oil and gas, as Western countries increasingly refuse to buy energy sources from Russia, as part of co-ordinated sanctions to starve Putin's war machine funding.
Mainland Europe - which relies on Russia for 40 per cent of its gas supplies - will be harder hit than Ireland, which buys most of its oil from the UK, Norway and the North Sea, but the country will not avoid harsh price rises.
“It is not just oil and gas,” said Mr Mangan, “but a broad range of commodity prices, particularly wheat but also things like nickel (used extensively by the car industry).”
“Commodity prices are on fire,” he added.
“Who would have thought the Irish government would have had farmers in this week, pleading with them to plant crops, as we could be short of wheat.”
While sanctions on Russian oil will hit global supplies, efforts by the likes of the EU and the US to seek energy elsewhere will not plug the gap, he told the online webinar.
“It takes time to diversify away from other markets. It doesn’t happen overnight.”
Nor will Government initiatives, such as cutting excise duty or financial support schemes for household energy bills, offset the “supply side shock”.
“As it is, Russia is finding it hard to supply its oil. A lot of people just won’t take it. We are going to have a physical shortage of commodities.”
Interrupted supply chains
Russia and Ukraine are also major suppliers of other commodities, particularly agricultural products, which will sharpen the impact, with “interrupted supply chains” already resulting in “factories shut down.”
“The bottom line here is how that impacts economic activity. One is that higher inflation depresses real disposable incomes,” he said.
“Wage growth is not going to keep track with the spike in inflation. That is going to depress economic activity. The uncertainty this brings as well will impact on investment activity.”
Rising prices will “spread out over the economy,” according to the economist.
Mr Mangan said central banks - which are on the verge of substantial interest rate hikes, and the European Central Bank expected to move out of the "era" of negative rates - have a very "difficult balancing act" to avoid a recession.
Both central banks and governments find it easier to deal with demand shocks - they can increase government spending and cut taxes to boost buying - but “this time around it is not just higher prices - there are questions around the supply of commodities.”
The interest rate hikes are “going to push inflation even higher,” he forecast.
“Over 2022 and 2023, rates are going to rise, maybe by 100 basis points in the Eurozone. That’s a big change.”
Mr Mangan said “hopefully we are able to avoid a recession, but there is a lot of talk of stagnation”, a flat-lined economy with high inflation, and no or negative growth.
On house prices, he said there were signs of a slowing in growth in both Ireland and the UK, which would be further hit by a dip in people’s disposable income.
But with a continuing shortage of supply, it is “unlikely house prices will fall back.”
The Eurozone will come under pressure, as the economy seen as most exposed to trading with Russia, its dependence on Russian oil and gas, as well as public spending hikes to deal with the resulting humanitarian crisis and beefed up defence budgets.
The war in Ukraine is looking like a “protracted affair”, provoking “a lot of uncertainty out there.”
“High prices are here to stay, this year and next year. We are looking at three years of high inflation,” he said.