Vladimir Putin has served a hell of a life for those in Ukraine and a perfect economic storm for much of the rest of the world. Anger over gasoline and diesel prices rising this week may just be the beginning of a tougher economic test to come.
There will be conditions for an inflationary spiral. Higher oil and gas prices are creating higher prices for motorists, households and businesses. Rising oil and gas prices will drive energy bills up even further, with electricity price hikes up to 30pc more.
Many predict that the war in Ukraine will trigger higher food prices as wheat is not exported or in some cases not even planted for next year.
We have seen carriers say they are struggling with higher fuel bills. Bus companies want more state support. Garbage collectors are raising prices due to higher fuel costs.
While motorists are looking for the best gas prices, economists are looking for the right model to make predictions about what will happen in the economy. They are scrapping economic forecasts for worldwide growth. Ultimately, it will depend on how long the war lasts and its next course of action.
The timing couldn’t be worse. Much of the global economy has yet to recover from the Covid-19 pandemic. In Ireland, we have seen parts of the economy that have remained extremely resilient in the face of Covid, but the overall picture seems to be heading in the wrong direction.
If the US, UK and EU all achieve their stated goals of reducing Russian oil and gas purchases, it will be a major challenge to worldwide supplies.
It is as if the economic clock has been set back to the 1970s. There is no doubt that the Irish Government is planning for a much stricter management of oil and gas supplies, and that could be the case. What that could mean for the economy and for households.
We cannot rule out having to consume the available gas supply and find ways to cut usage across society. It’s hard to see how economies can deliver any real growth in this type of scenario.
All of this poses a dilemma for the Government. This can be seen as temporary and borrowed to deal a blow to struggling families and businesses. It can be more conservative and assume a deeper, longer crisis, knowing that it can never solve financial pain through unsustainable higher borrowing.
The balance will have to be taken and it will not be easy to find.
Inflation will start to erode purchasing power and could dampen household spending at a time when we need people to spend after two tough years of the pandemic.
The only way out of that is through higher wages. This will be a great help for mortgage holders who may see some mortgage debt inflated. Businesses will be terrified by that prospect.
Reducing the burden of the inflationary spiral will cost the State a lot of money. Even the much-criticized fuel-consumption cuts will cost around 350 million euros. The €200 electricity credit doesn’t do much either, but it will put you past the €378 million mark.
If the war and the instability it brings continue, these measures may be just the tip of the iceberg. The state will have to borrow to finance important new measures to help families and businesses. Inflation looks set to continue rising at least in the short term. It has run at almost 8pc in the US and is expected to hit 9pc later this year in the UK. In such cases, it is difficult to see how it will not seriously affect the way it is spent.
How many Americans will visit Ireland this summer if inflation at home is 8pc and if airfares have to go up because jet fuel is more expensive?
The EU says it will provide shelter to all Ukrainian refugees entering its border. That number could be as high as three to four million. While it is absolutely the right thing to do, it will come at a heavy cost.
If Ireland takes in 100,000 refugees at a support cost of 10,000 euros per person per year, the additional social welfare bill amounts to 1 billion euros per year.
If rising fuel prices affect Irish household spending by about 2 percent, all of that money simply goes to Saudi Arabia or wherever we get our oil.
Despite all these very disturbing challenges, there are still some mitigating factors. The economy and state finances have gone through the pandemic much better than many people think.
The ECB announced its quantitative easing program earlier than expected as it bought billions of government bonds. This will increase government borrowing costs.
However, interest rates on government debt are so low that Ireland can still borrow money below the long-term average.
Mortgage interest rates are likely to increase before the end of the year. However, many homeowners are on a flat rate and will be affected by the harsher consequences of this – at least for a while.
After years of low interest rates and low inflation, the cycle changed before Russia invaded Ukraine. Conflict hastened the process and brought things into focus.
A short-lived Putin victory would be disastrous for the Ukrainian people and the wider world as sanctions and a new Cold War would be likely anyway. A longer conflict would prolong the intensity of the economic pain.
This is a war without a winner.
https://www.independent.ie/opinion/comment/meeting-full-obligations-over-refugees-will-cost-1bn-a-year-and-is-the-right-thing-to-do-41437882.html Meeting refugee obligations will cost €1 billion a year and is the right thing to do