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Threats the economy is now facing could eclipse Covid

How on earth do we understand what’s going on? We are facing the biggest cost of living crisis in a generation, businesses are being pressured by rising costs and wage demands, yet the economy is flying. Unemployment has returned to post-crisis levels, consumers continue to spend, there are thousands of job vacancies and home prices continue their seemingly inexorable upward trend.

Part of this relates to the resilience of the economy demonstrated by Covid-19. Backed by government support, households and businesses emerged better than expected. The multinational sector rallied, benefiting from a global post-Covid recovery. The economy started 2022 in remarkably good shape.

Then Russia invaded Ukraine and the inflationary crisis worsened very quickly. So are we now like the road runner, moving his legs quickly but already over the edge of the cliff and heading for a big fall? Not yet. Business cannot defy gravity. So the current international slowdown will hit here and the growth rate will slow later this year and into 2023. Inflation will spread and remain a major problem. So much seems clear now.

Whether we are headed for something worse depends largely on the course of the war and its broader economic impact. Nobody knows how that will go. If you wanted to outline a negative scenario, it would mean that gas supplies from Russia suddenly stopped and the EU fell into recession. Global equity markets are at least now clearly reflecting concerns about a sharp slowdown.

Economic growth will slow down. Part of the contrast between current economic data and rising inflationary pressures is down to timing

There is a lot of uncertainty, but little clarity. We have some important buffers. The economy is much healthier than it was when we last had a real problem in 2008. Many consumers – mostly better off ones – have plenty of cash in their bank accounts. We don’t have the kind of credit bubble that burst so spectacularly back then. The arrival and expansion of a phalanx of knowledge-based companies has boosted jobs and tax revenues.

But economic growth will slow down. Part of the contrast between current economic data and rising inflationary pressures is down to timing. Small businesses are busy coping with rising demand and rising costs, but consumer spending will be hit later this year as the cost of living continues to fall.

investment slowdown

Large multinationals have budgets for this year and many are expanding. But new investments – those for the end of this year and through 2023 – are now under scrutiny. Some will be put on hold. Fears of an international slowdown along with rising costs across the board come into play.

Something similar happened at the start of Covid-19 – a kind of foot on the economic brakes as everyone waited to see what would happen. The accelerator was soon put back on in many areas – and others have bounced back as they reopened. But what is happening now could pose a greater threat. The pandemic has hit consumer-related sectors – the energy crisis and its inflationary consequences are hitting everyone.

It’s a difficult situation for the government to contend with, with demands for public sector wage increases, continued pressure on spending elsewhere – compounded by inflation – and on the other side risks to tax revenues if growth slows. The problem is to negotiate for tomorrow on the basis of today’s very buoyant earnings.

This has led to a complicated dance, with suggestions that some sort of “social partnership lite” could be revived, with other factors besides wages being included in the talks between employers, unions and the government. Taoiseach Micheál Martin appeared to want to “reattach” the partnership’s bonds, as one source put it, and unions are also hinting that advances in areas such as health care and childcare could be part of a package that could emerge from the negotiations.

But others in government are cautious, and there is an argument that the forum in which all this has been raised – the Labor Employer Economic Forum – is appropriate for workplace issues, as it includes employers and unions, but not for broader policy issues. Where the line is drawn here is of course debatable – the latest published forum logs relate to the summer of 2019, but we know it’s already strayed into areas like the impact of childcare on staff.

clear houses

Employers and unions naturally want as much say as possible. But as this goes on, demands from other groups to be represented will grow. And going back to the big plenary forums of the partnership’s glory days, where the goodies are shared around a table, wouldn’t be a wise idea. Also, unions now represent a smaller proportion of private sector workers than when the partnership began in the late 1980s.

This will be politically sensitive and difficult. Now the government must use the tax revenues wisely

However, as the old adage goes, it’s good to talk, especially given the uncertainty now facing the economic outlook. As in the times of Covid-19, when the forum played a role, clearinghouses can be helpful to get things done quickly and avert problems. And there are many key issues related to the workplace, the government’s agenda in areas like sick pay, pensions and entitlements, and how it’s all paid for.

It won’t be easy to keep things together. Pressure on the cost of living will increase, a successful public collective agreement is far from certain and many private sector workers will also be under severe pressure. This will be politically sensitive and difficult. For now, the government needs to use tax revenues wisely and continue to build up the emergency funds observed over the past few years. This allows it to anticipate a likely slowdown in growth — and in the worst-case scenario, it at least has some crucial wiggle room.

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