Prices of goods and services could soar by up to 9%, warns AIB chief economist

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Prices for goods and services in Ireland are set to rise by nearly 10% following Vladimir Putin’s invasion of Ukraine, AIB chief economist Oliver Mangan has warned.

People can expect a big hit to their disposable income “before too long” as wage increases won’t match unexpected inflation hikes, which could hit consumers over the next three years, a- he predicted.

“We could see inflation rates of 8 or 9 percent before too long,” Mangan said.

“You would have been kicked out of a room in a white coat if you predicted it a few years ago.”

Speaking at a post-Brexit cross-border conference, organized by Newry and Dundalk Chambers, Mr Mangan said it was a “strange time to say the least” for the Irish economy.

After dealing with the fallout from Brexit and then the Covid pandemic, Russia’s assault on Ukraine has piled up “a lot of economic uncertainty” for the foreseeable future, he warned.

While there was a ‘much bigger than expected’ rebound in the economy last year – Irish domestic market growth of 6.5% – as Covid restrictions were eased and unemployment plunged, the war in Europe “put the spade 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 in the future “, he added.

“We expected inflation to rise – but nowhere to the extent that it happened,” he said.

Much of the uncertainty is due to the shortage of oil and gas, as Western countries increasingly refuse to buy energy sources from Russia, under coordinated sanctions aimed at starving the financing Putin’s war machine.

Continental Europe – which depends on Russia for 40% of its gas supplies – will be hit harder than Ireland, which buys most of its oil from the UK, Norway and the North Sea , but the country will not avoid sharp price increases.

“It’s not just oil and gas,” Mr. Mangan said, “but a wide range of commodity prices, especially wheat, but also things like nickel (widely used by industry car).”

“Commodity prices are on fire, he added.

“Who would have thought the Irish government would have had farmers this week begging them to plant crops because we might run out of wheat.”

While sanctions on Russian oil will affect global supply, EU and US efforts to look for energy elsewhere will not close the gap, he told the online webinar .

“It takes time to diversify away from other markets. It doesn’t happen overnight. »

Government initiatives, such as reductions in excise duties or financial support programs for household energy bills, will also not compensate for the “supply shock”.

“As things stand, Russia is struggling to get oil supplies. A lot of people just won’t take it. We are going to have a physical shortage of raw materials.

Supply chains interrupted

Russia and Ukraine are also major suppliers of other commodities, particularly agricultural products, which will compound the impact, with ‘broken supply chains’ already leading to ‘factories closing’ .

“The key here is how it affects economic activity. The first is that higher inflation lowers real disposable incomes,” he said.

“Wage growth will not keep up with soaring inflation. This will depress economic activity. The resulting uncertainty will also impact investment activity.

The rise in prices will “spread through the economy”, according to the economist.

Mr Mangan said central banks – who are on the verge of raising interest rates dramatically and the European Central Bank is expected to emerge from the “era” of negative rates – have a “very balancing act”. difficult” to avoid a recession.

Central banks and governments are finding it easier to deal with demand shocks – they can increase government spending and cut taxes to spur buying – but “this time around it’s not just about higher prices high – there are questions about the supply of raw materials”.

Interest rate hikes “will push inflation even higher,” he predicted.

“Over 2022 and 2023, rates will go up, maybe 100 basis points in the eurozone. That’s a big change.

Mr Mangan said “I hope we can avoid a recession, but there is a lot of talk about stagnation”, a stagnant economy with high inflation and zero or negative growth.

On property prices, he said there were signs of slowing growth in Ireland and the UK, which would be hit even harder by a decline in people’s disposable income.

But with a continuing shortage of supply, house prices are “unlikely to fall”.

The euro zone will be under pressure, as the economy is seen as the most exposed to trade with Russia, its dependence on Russian oil and gas, as well as rising government spending to deal with the resulting humanitarian crisis and strengthening defense budgets.

The war in Ukraine looks like a “protracted affair”, causing “a lot of uncertainty there”.

“High prices are here to stay, this year and next year. We are looking at three years of high inflation,” he said.

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