The Central Bank of Ireland has revised down its forecast for modified domestic demand growth to 4.8% in 2022, 4.3% in 2023 and 3.9% in 2024.

The CBI’s second Quarterly Bulletin of 2022 suggests that the effects of the war in Ukraine and surging inflation will be long-lasting.

Central Bank economists note estimates that the conflict will reduce euro-area GDP by 1.5% by the end of 2023.

While Ireland’s direct trade links with Ukraine and Russia are small, there will be an impact on demand in our main trading partners and an increase in transport costs.

The CBI says exports are forecast to grow by 8% in 2022, 6.2% in 2023 and 6% in 2024.

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The bulletin expects consumer price inflation to average 6.5% for 2022.

“Wholesale energy prices are the primary factor driving inflation at present, with financial markets expecting them to decline in the second half of the year but remain above 2021 levels over the course of our forecast horizon,” says the Central Bank report.

“Conditional on these assumptions, inflation is forecast to slow to 2.8% in 2023 and 2.1%  in 2024.

Despite the economic headwinds, personal consumption will continue to grow as household spending patterns normalise in the absence of public health restrictions, though the reduction in real incomes from higher inflation will be a drag on spending in the coming quarters.

According to the bulletin: “High frequency indicators show that the first quarter saw a strong rebound in spending and activity as restrictions eased. Over the forecast horizon, consumption is forecast to grow by 7.4%  this year, slowing to 4.7% and 3.9% in 2023 and 2024 respectively.”

The increase in uncertainty and disruption to supply chains will constrain investment growth this year and next, the bulletin states.

“While planning permissions and commencements indicate a strong pickup in construction this year, higher materials costs and labour shortages are forecast to constrain growth in the sector over the forecast horizon.”

The view from the Central Bank after Q1 2022 is that the risks to the growth outlook are tilted to the downside.

“The baseline forecast is conditional on market expectations of the future price of energy and other commodities. A larger or a more protracted energy shock would result in lower growth and higher inflation than outlined in the baseline forecast,” the bulletin cautions.