Prices will not fall back this year as swiftly as predicted by most forecasting models

The Irish economy has navigated stormy waters better than was anticipated and appears to be sailing into 2022 having proved itself as more resilient and adaptable than commentators had projected. However, perhaps symptomatic of the times we live in, we have emerged from one storm to find the water ahead does not look as calm as we had hoped. New challenges loom large – hardly a just reward for recent endeavours.

Talent shortages, rising prices, continued Brexit uncertainty and an urgent need to tackle long-standing social problems and accelerate sustainability efforts are sharply in focus as the new year gets under way. Scant consolation perhaps, but at least the challenges relating to talent and price increases are, in part, a function of the economic strength and resilience shown. Better to be worrying how to meet demand than trying to find it.

Perhaps the defining feature of 2022 will be the realisation that true transformation is needed to make future growth both affordable and sustainable. Tomorrow cannot look like yesterday, however much we might miss a pre-pandemic world.

A sense of fatigue

“I am looking forward to a break” was the most common refrain I heard when meeting clients and colleagues (virtually) before Christmas. What was a sense of optimism and confidence for 2022 was tempered somewhat by the emergence of the Omicron variant and a feeling of weariness was creeping in.

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While the majority of us – from business leaders and policy makers to employees and citizens – have returned feeling somewhat refreshed from a break, the year didn’t end as we had perhaps hoped or expected. Our experience economy should have been busy with people celebrating and socialising, enjoying cultural activities and entertainment together. This kind of leisure time has a profound effect on who we are, what we do and how good we are at doing it. There is a material economic hit to productivity when we are not at our best. and the absence of many of these opportunities are not the conditions for stepping into the new year at our very best.

The economic cost of the pandemic is still rising, and though the policy approach of “whatever it takes” still applies for now, it will increasingly need to be more focused, particularly if the cost of borrowing begins to rise. At present the markets expect no rate rises in Ireland in 2022, but the path of inflation and the increase already announced in the UK, and shortly the US, may well bring forward the first upward move by the European Central Bank. Better-than-expected tax receipts over the past year reflect a remarkable resilience and a sectoral structure that have been in high demand during a global pandemic. This should not, however, provide a false confidence that spending can rise indefinitely.

Prices are rising sharply and, in my view, will not fall back as swiftly as predicted by most forecasting models. This has reduced how far our money goes and will add further difficulties to those on the lowest incomes, whom the data shows have once again suffered the most from a crisis not of their making.

Need for transformation

There has been much written on the need to transform our healthcare, our energy use, our infrastructure, our housing and many other aspects of how we live and work, but the financial drivers of change are beginning to reach critical tipping points.

Faced with rising fossil fuel costs, it is becoming clearer that not transforming our energy use more swiftly to renewables will be more expensive than making the investments required to accelerate change. Similarly, on housing and infrastructure, the costs of failing to transform our existing stock will far outweigh the costs of investing. Most profoundly of all, the rising cost of healthcare is unsustainable.

With health spending exceeding €22 billion in 2021 and the total income tax/ USC receipts in Ireland projected to be €24.5 billion, the scale of the issue is clear. Estimating the cost to deliver change can be hard to predict and control in a time of rapid price inflation. Given the year we are looking at, this is perhaps aptly described as a classic Catch 22 situation.

We need to spend the money to drive down future costs, but spending it now will drive up the very costs we are seeking to reduce. The experience of the pandemic and Brexit has, however, shown the possibilities for fast-paced transformation. The swift and sizeable government interventions to support the economy should lead to a radical rethink of how long it takes to get from strategy to implementation, and to delivery on a range of transformative projects that are urgently needed. Business, too, has re-profiled ways of working and reframed cost bases in a way that has shown that a sprint mentality for organisational change is achievable.

The economic prospects for 2022 remain strong, the Government, businesses and consumers are all set to be deploying capital which will drive growth. However, Omicron has the potential to stall growth in the first quarter and possibly beyond, and though it may feel a long way off, it is important to plan for when the wave passes. The robust spending profile will also accentuate the challenges of talent attraction, price control and planetary progress. Returning to our shipping analogy, 2022 may prove to be an all-hands-on deck moment for Ireland.

Growth will be hard won, it will not come from inaction or a desire to recreate the past, but from transforming how we work, what we prioritise and how we value our people.

Neil Gibson, chief economist, EY Ireland