Editorials

The Irish Times view on the economic impact of the Ukraine war

One year on, the fall-out from the conflict has had major economic implications, though the feared fall into recession has so far been avoided

Rising energy bills have been a big burden on households, though wholesale prices have now fallen back to pre-war levels ( Photo:PA)
Rising energy bills have been a big burden on households, though wholesale prices have now fallen back to pre-war levels ( Photo:PA)
Mon Feb 20 2023 - 21:30

The economic impact of the Ukraine war has been substantial, though a year on there are signs that some of the worst initial forecasts will not be realised. The EU economy looks likely to avoid recession – though growth will slow sharply – while wholesale energy prices have fallen significantly. In Ireland, household income has been hit and living standards have dropped for the first time since the financial crash, but the economy remains fairly resilient.

Of course much now depends on the future, unpredictable, course of the war. The EU has weaned itself to a significant extent off Russian energy, helped by a mild winter but also by policy action. However, any widening of the conflict could clearly have a severe economic impact, as well – of course – as much wider consequences.

The unstable situation makes decisions for governments much more difficult. Policy is always made against a background of uncertainty, but first Covid-19 and now the war in Ukraine have brought this to a new level.

The difficulty is not only dealing with the immediate issues, but ensuring that longer-term policies are kept moving along. In politics, the urgent often displaces the important. Fortunately in some cases the two can coincide – the situation is pushing governments to accelerate the move to renewable energy, a key longer-term priority.

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For Ireland, it is clear that domestic growth has slowed and key export markets are flat; 2023 will bring significant challenges and may be the end of an extraordinary streak of growth which was only briefly interrupted by Covid-19. Yet the economy remains in better shape than was anticipated last summer, when energy prices were at their height. Despite a cut by one provider, a meaningful fall in energy costs to households may be slow to arrive – but arrive it will if wholesale prices hold current levels or fall further.

This is the backdrop to key decisions to be signed off at Cabinet today over a further cost-of-living package. The priorities must be supporting those worst affected, while also ensuring that there is enough leeway in the public finances to step in again if, for example, energy prices do rise sharply again heading into next winter.

There is a need to separate consideration of temporary measures from permanent ones. Temporary supports are affordable – up to a point – given the strong position of the national finances. For less well-off households they will also be essential, as energy prices remain high – and are unlikely to fall back to pre-crisis levels – and other essential costs – such as food – continue to rise.

Permanent measures are another matter. The cost-of-living shock has left Ireland worse off. The Government should have a better idea come budget time in the autumn about the outlook. Longer-term supports may then be called for – along with plans about how they will be paid for.