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Cliff Taylor: 15 key economic issues to watch out for in 2022

Smart Money: The only real certainty is uncertainty as we continue to grapple with the pandemic

We enter 2022 as we did 2021 – with a wave of Covid-19 and much uncertainty. But a lot has changed, too, with vaccination and a changed international economic backdrop.

Here are 15 things to watch out for in 2022.

1. The virus

The obvious one, with uncertainty about what happens with the Omicron wave and after it passes. Expect a push and pull as restrictions are eased. The winding down of many of the main business supports, probably in early summer, will inevitably send many businesses to the wall.

But the Government will have to continue to help some sectors to get back in business. And new variants after Omicron remain a concern, as the Department of Finance pointed out in its end of year briefing this week.

In this light, the key strategic question is the longer term impact of Covid-19 and how policy should adapt– for example via changes to unemployment and sickness benefits and other social supports, or a system of business supports which can be switched on and off as needed.

We really still have little idea what Covid-19 means in the longer term and this is vital for the economy and public finances.

2. Tax and spend

Can the surge in taxes, particularly corporation tax, continue? And how will ongoing Covid supports affect Government spending?

There is plenty of leeway and contingency money in the budget for 2022, but the trends still bear watching as they will have a vital impact on future years. There is a strong argument for setting significant contingency funds aside beyond this year in case corporation tax receipts fall away or Covid-19 costs linger, as they surely will in some form.

3. Tax and spending policy

The outlook for the public finances and key policy issues are being discussed by a tax and welfare commission, due to report over the summer.

The publication of this document will be a key moment and will underline the need for new revenues to meet the bills of an ageing population, the green agenda and more social spending. Higher PRSI payments will only be the start of it and Budget 2023 next October will be a vital one for this Government.

4. The corporate tax deal

The outline shape of the OECD corporate deal is clear – carrying mixed implications for Ireland. But the Biden administration hasn't yet succeeded in getting its key legislation on the proposed 15 per cent global minimum tax rate through Congress.

So the OECD deal could yet collapse, creating uncertainty about the global corporate tax picture and potential international tensions. Having committed to the deal, Ireland needs it tied down now.

5. Inflation

The return of inflation was one of the big stories of 2021 – driven by gummed up supply chains and soaring energy costs.

The inflation rate may not peak until the spring, but if it doesn’t start to fall then shivers will go through the markets and the political impact will become more severe as the cost of living comes into sharp focus.

Even the impact of Omicron on prices is uncertain – it could slow demand and thus ease price pressures in the short term, but could also gum up supply chains again, particularly if the Chinese zero tolerance Covid policies lead to more shutdowns there.

6. Central Bank interest rates

The Bank of England increased interest rates in December and the US Fed will shortly follow. The ECB will hold off, for now, but could come under pressure to move late in the year if inflation stays high. But the big question is how high interest rats will rise in this cycle over the next three to five years.

For the best clue in the short term, watch the Fed. And expect debates about the appropriate role of central banks after a period when monetary and fiscal policy effectively unified in a massive efforts to offset the initial Covid-19 hit.

7. Long-term interest rates

Watch long-term interest rates on markets for Government and corporate bonds. Will they start to shift noticeably higher? Already longer-term US rates are edging up as the inflation outlook is reassessed.

These rates are vital for government borrowing, funded in recent years at rock bottom rates. Also,money has been driven into all kinds of investments by what is called the TINA argument – there is no alternative because safe haven investments offered so little. But if bond interest rates go higher, then investors will have an alternative home offering a safe return.

8.The markets

It is never wise to forecast what might happen to markets. But there are two key dangers. One is that the equity markets are highly-valued and betting on a recovery from Covid-19. Bad virus news could lead to sell-offs.

And on the flip side we have seen before – notably in the so-called taper tantrum as the US tried to increase interest rates in 2013 – how tricky it is for central banks to push up interest rates after a long period of slow growth and how the consequences of US action in particular can wash across the industrialised world and emerging markets.

The biggest risk is if both of these things happen together – lingering Covid-19 problems hitting growth combined with high inflation.

9.The green agenda

We had a skirmish late in the year as the Climate Chang Advisory Council published its proposals on the carbon budget targets and the Government published its Climate Action Plan.

But it will be 2022 when the targets are set in stone, sector by sector, under binding legislation. This will see an almighty row over how different sectors will contribute to cutting emissions – farming, transport, households and industry – and how the bills will be paid.

This presents big political and planning challenges for the Government.

10.The housing crux

Can the Government start to make progress on housing? Its big Housing Plan was published late last year, but with prices and rents rising there is still a feeling of running to stand still.

Housing starts should pick up, though affordability will remain a problem and the challenge of bringing down rental costs look significant. As well as a social problem, this is now a vital issue for competitiveness.

11. Jobs

There is better news for the Government on employment , where a surge in job numbers in the second half of last year had brought employment back to where it was pre-pandemic, though now restrictions are pushing people back on to the PUP.

For 2022, watch for the fall-out in the exposed sectors as supports are wound down – and for the impact of job shortages elsewhere which could start to affect investment and growth. The dual economy will remain in evidence.

12.Curveballs

The international economy can always throw curveballs at Ireland. What will happen about Russia and the Ukraine? Where will energy prices go? What will happen in the EU as a new German chancellor beds in and France heads towards a presidential election?

13. Brexit

And there is always Brexit. Talks on the Northern Ireland protocol drag on and may or may not succeed. If they fail, does the entire agreement under which the UK left the EU come into question and what will this mean for future trading arrangements between Ireland, Northern Ireland and Britain?

As well as the Republic, this is also vital for Northern Ireland, where potential investors will be reading the signals. Will the mood music around the talks has improved a bit of late, anything could still happen.

14.Who will run the economy?

Tánaiste Leo Varadkar is due to take over as Taoiseach at the end of the year. But does this mean that Paschal Donohoe, the finance minister and Michael McGrath in spending switch jobs? There had been some expectation that this might happen. But nothing appears tied down . . .

15.Who will run the economy ( part 2)?

The next general election is not due until February 2025, though who knows? And with Sinn Féin riding high in the polls, their policies will come under increasing focus.

There are signs of the party moving more towards the mainstream in policy terms, though its populist instincts remain, for example in opposing carbon tax increases and the local property tax.

Party leader Mary Lou McDonald made an interesting intervention in an Irish Examiner interview this week, calling for a greater focus on getting the public service to get things done and to remove blockages in areas like planning.

Meanwhile its reaction on the climate targets debate and to the report of the commission on tax and welfare will be worth watching.