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Economic consequences of invasion of Ukraine

23rd March 2022: ISME notes the latest release by the Economic and Social Research Institute (ESRI) on the economic consequences of the Russian invasion of Ukraine and that it makes sober reading for everyone. While inflation was already rising before the invasion, we are now seeing severe impacts on consumer prices, particularly on basic food products and on fuel.

The war being inflicted on the people of Ukraine will impact the whole of Europe at a point where most countries were looking optimistically at exit from the worst economic affects of the global pandemic.

The rapid increase in the cost of food, fuel, goods and services comes as a shock to a society that has not seen real inflation in two decades. This will naturally prompt demands for increases in pay to meet the higher cost of living. But Irish people need to be realistic about the extent to which rising wages can cover inflation. Labour represents a significant proportion of the cost of sales for many Irish businesses, particularly those in the grooming, cleaning, food, leisure, childcare, hospitality and construction services sectors. Those businesses can increase wages only to the extent that they can recover the increased labour cost from their customers, or make savings elsewhere. And of course, businesses raising their prices contribute further to inflation.  Government will have to moderate pay expectations among public service workers, as they are most protected from the impacts of this war.

There is also the uncomfortable reality that many Irish businesses continue to trade solely because of Government grants and wage supports, and Revenue forbearance on warehoused taxes. The fact that business insolvencies during the pandemic were lower than in 2019 suggests that thousands of Irish businesses are trading viably purely because of Government support, which is ending now.

Neil McDonnell, Chief Executive of ISME said: “We will have to face the fact that neither the Irish Government nor Irish employers will be able to fully make good the rapidly rising costs of living wreaked on citizens due to Russia’s invasion of Ukraine. The Government’s primary focus must be on the weakest members of society with the least ability to meet these costs, while the rest of us must accept that war will impact our standard of living.”

“The terrible suffering of the people of Ukraine, the refugee crisis prompted by it, and the costs of that war on Irish and other societies, will be ended only when Russia lays down its arms and withdraws from its unlawful invasion of Ukraine.”