Watching the economic news in recent weeks is like watching two movies at the same time. One is a horror show as households and businesses are hit by soaring energy prices, sent sharply higher by the terrible war in Ukraine. The other is a happier tale, as the IDA rolls out one jobs announcement after another, and the Department of Finance, not known for its optimism, fails to see any likely scenario this year in which the economy does not grow.
The hard economic data – jobs and incomes – is remarkably strong, but at the same time surveys which take the measure of business and consumer confidence are weakening fast. Companies have been growing – and desperately fighting to attract and hold on to staff. But now many are thinking about pressing the hold button on expansion plans or certain product lines, at least until the energy price situation clarifies.
How can we make sense of this ? It’s all about momentum – the “Big Mo” as they call it in US sports. During Covid-19, the economy took us all by surprise. The strong performance of the exporting sector, combined with well-implemented supports for domestic businesses, meant that the economy entered this year growing strongly. The IDA had a very strong pipeline of projects in negotiation now for some time with these big players apparently happy that Ireland’s commitments to the OECD tax plan won’t cause problems.
So we have seen the tightest labour market since the Celtic Tiger days. And a string of really big job announcements from companies such as Intel, Workday, Citi, MarketStar, Boston Scientific, Jannsen and many more.
Energy prices
This post-Covid economic momentum means that the economy will be fine this year. The Department of Finance cut its growth forecasts during the week in its Stability Programme Update. But it still sees the domestic economy growing by 4.4 per cent this year. And even if energy prices shoot sharply higher, the department believes growth will remain in positive territory. In terms of forecasts, this is glass half full, not half empty.
This year will look after itself, but 2023 is another matter. Economic turning points are almost impossible to call. Look back at the gradual weakening of forecasts through 2008 as it only slowly became clear that it was going to be a crash landing rather than a soft one. Or the emergence from the financial crash after about 2014 when few spotted the speed of recovery.
It looks very likely now that the momentum of growth will be slower heading into 2023. Many manufacturing businesses will hold off on investments until the outlook for energy prices remains clearer. Consumer spending will be supported by post-Covid savings, but recent surveys show confidence falling off sharply. The cumulative impact of Covid-19 and the war will take a toll.
Sooner or later, as one observer put it, the real economic data and the confidence indicators will end up coinciding. This doesn’t necessarily mean that real economic activity will decline – but it will surely, at least, come off the boil. The initial drop in confidence and activity after Covid-19 hit quickly but then reversed in most sectors. But the Government simply will not have the same firepower to protect the economy this time.
It has some financial leeway for this year, with the forecast for the deficit way below the target set in last October’s Budget. Again, the issue will be 2023. By then, the cost of borrowing to fund state expenditure could conceivably be in the 2 to 3 per cent range, compared to effectively zero during the pandemic. The Department of Finance’s economic forecasts warn that a cutting off of Russian energy supply could lead to the state finances remaining in deficit next year, just as interest rates are rising.
Structural issues
Ireland also faces longer-term structural issues. The ageing population and the green transition will put pressure on Government spending. And the war has underlined the likelihood that globalisation – the relentless spread of supply chains across the world in search of lower costs – may look different in future. Firms are reassessing where they source and where they sell, based on security of supply and now political factors. More business may be done locally, or regionally, and less globally. For a State that has cashed in on globalisation, Ireland would, as the Department of Finance said using the careful phrasing beloved of public servants, "not be immune if this proved to the case".
It is a difficult backdrop for policymaking. The pandemic created the illusion that the Government has endless resources. And so the limited nature of the measures to address the energy crisis is controversial. The story that Ireland has taken an economic hit which will leave most people worse off is a hard one to sell. Less well-off households must be protected, but the measures aimed at the general population will only absorb some of the pain.
With the jobs market so tight and higher inflation eating into real earnings there will be big pressure on wages and costs. This could threaten competitiveness by pushing costs and prices up more quickly here than elsewhere. A delicate balance needs to be struck in negotiations on public pay – and it will be interesting to see if the Government sends any signals in relation to private sector pay. Ireland – already an expensive place to live and do business – cannot afford to get further out of line over the next couple of years.
The resilience of the economy in recent years gives cause for some confidence. The economy is diversified and has significant strengths. The number of people at work is, remarkably, at a record high. But as it addresses the inflation crisis, a key policy task for the Government is to adhere to the Hippocratic oath – first do no harm.