The Irish economy is about to take off. The easing of restrictions over the next few months, combined with existing strong momentum, will lead to a surge in growth. It is impossible to know how long this will last for, but right now Irish consumers are ready to spend. And many of them have the cash to do so.
Growth during the pandemic has confounded expectations. It’s best to ignore the Irish GDP figures, likely to have risen by 14-15 per cent last year, but looking at more reliable measures suggests a growth rate of 5 or 6 per cent in the domestic economy in 2021, a strong performance in any year, never mind one when there was a pandemic.
This was all the more remarkable given the huge problems faced by the consumer-facing parts of the economy. As restrictions came and went, consumer spending has ebbed and flowed. But it will now be the X factor pushing growth higher through the spring and summer of this year.
Beyond that, it depends on Covid-19 and what happens heading into next winter. And this very uncertainty is going to add to growth over the coming months. Scarred by last year, when the spread of Delta made for a nervous summer – until we got vaccinated – and Omicron messed up Christmas, Irish consumers are not going to wait around this time.
All we can do is play the ball in front of us, while preparing in case things do get difficult again
Nervousness and caution will still affect the behaviour of many, particularly as things have changed so quickly. But most people are not going to sit on their hands for long before planning staycations, nights out, summer holidays and concerts – all the things we have missed – as well as continuing to spend on homes and gardens. They will make the most of the spring and summer, in case things tighten up again in the autumn and winter.
Perhaps they won’t. But we just don’t know and it seems foolhardy to assume that Covid-19 is “over”. For now, the idea of “living with Covid” suggests a level of certainty that simply does not exist. For now, all we can do is play the ball in front of us, while preparing in case things do get difficult again.
The immediate impact of easing restrictions will be a sense of relief and some confusion as people try to work out what it all means. There is a record €135 billion or so sitting in household spending accounts. Central Bank research has said that €15 billion or more of this cash may now be classified as "excess savings" – more than half of this will be spent, it has estimated. It is probably already a factor boosting house prices.
We are in for a mini consumer boom, with extra spending focused on areas where restrictions have limited activity, but not confined to these. Add extra spending to the strong growth momentum in other parts of the economy – the part dominated by multinationals – and you get a hot economy; potentially a very hot one. With labour already in short supply in many sectors, we will see rising wages, while higher demand will allow businesses to pass on higher costs from wages and other areas.
The policy issues here divide into two – the short-term Covid-related ones and the longer-term challenges. In terms of Covid-19, Ireland has had a higher level of restrictions than many other countries through the pandemic . One of the policy goals this time will be to set a better reopening baseline than last year – in other words to ensure that pretty much everything will be open in a normal way at a time when the Covid threat is seen as low.
As well as providing a boost, this gives more options if at some stage we have to deal with another variant. As one source put it, if we keep asking hospitality to close at 8pm now, do we go to 6pm if another wave hits? It also isn’t politically credible to maintain many of the restrictions if there is no pressure on hospital numbers, which was the real fear when Omicron hit.
A tricky political task will be ending the economic supports and particularly the wage subsidies, still supporting more than 280,000 jobs. These are due to see payment levels reduce in the months ahead and to be phased out by the end of April, or the end of May for businesses hit by the latest restrictions. The hope will be that many jobs can first move on to lower payments rates as the reopening gathers pace, and then move off subsidies completely. There will be some jobs lost here, inevitably, but the Government can’t continue to subsidise employment once sectors are open for a period, given the long-term pressure this would create on the exchequer. Wage subsidies during the pandemic have cost €10 billion – money well spent but not sustainable in the longer term. The scheme’s structure is there if, at some stage, restrictions are seen as necessary again.
Internationally, there are clear signs that the era of super-low interest rates is coming to an end
The next few months will be interesting to watch. Expect real pressures in the jobs market – Ibec’s recent economic outlook identifies labour shortage as one of the key longer-term issues Ireland now faces. And beyond that there are big issues looming – the need to raise taxes to pay for an ageing population, the over-reliance on corporation tax, the unknown impact of global tax changes on investment here, the housing crisis and the impact of climate change policy.
All of these could slow economic growth in the years ahead and lead to more pressure on the public finances. Internationally, there are clear signs that the era of super-low interest rates is coming to an end, with potentially significant implications too. Tighter constraints on Government spending could soon reappear. And higher prices are already hitting into household incomes, making the cost of living a live political issue.
So the longer-term outlook is clouded. But for the coming months we are looking at a surge in the economy as we emerge from Omicron.The relief rally is on.