We’re in the post-crisis phase of the economic cycle, an interregnum marked by competing and contradictory forces.
Wages are rising because of labour market shortages but real income is falling because of inflation. If high-earning professionals look set to benefit from the current skills shortage, lower-paid workers are being clobbered by higher energy bills.
The two trends aren’t unrelated. If wage demands become entrenched, inflation will become entrenched. And while the Government is stepping back from Covid supports, perhaps mindful of other spending pressures up the line, it is simultaneously considering a more interventionist approach to the current cost-of-the-living squeeze.
A bigger energy credit, a reduction in VAT and a hardship fund are some of the measures under consideration.
And while the ending of restrictions promises a return to more normal trading conditions and, according to the Central Bank, a return to full employment by 2024, this new normal implies higher levels of digitalisation and remote working, a potential death sentence for many traditional bricks-and-mortar businesses.
Some firms are likely to find their pre-Covid market has disappeared online. Others which relied on office culture and city-centre footfall may find life hard on the other side.
Following another set of positive exchequer numbers last week, Minster for Finance Paschal Donohoe signalled the Government would now move to expedite the phased ending of the Employment Wage Subsidy Scheme, the largest element of its support measures.
From the beginning of this month, most businesses moved to the reduced weekly rate of support of €203 per employee. This will be followed by the weekly flat-rate subsidy of €100 per employee for the final two months of the scheme in March and April. There was no mention of a follow-up scheme.
“We are now shifting our focus towards the phased exit from the scheme, which is commencing this month for most businesses as they transition to the reduced rates of subsidy,” Mr Donohoe said.
The removal of these supports will almost certainly trigger a series of business failures. According to insolvency practitioners, there are hundreds of debt-laden zombie firms that have no chance of making it without supports while other more viable entities face a tricky period trading themselves out of trouble and repairing their balance sheets.
Whether there will be a big bang of insolvencies or just an increase, nobody – not even the Government – knows as it comes down to the relative finances of individual businesses. To use Warren Buffet’s quip, we’ll learn who is wearing trunks only when the tide goes out.
That said the Central Bank’s latest assessment of the economic outlook couldn’t have been more positive. The regulator forecast up to 167,000 jobs could be created in the Irish economy over the next two years as it shrugs off the effects of the pandemic, consumer spending reverts to more normal levels aided by billions of pandemic savings.
The transformed economic outlook is also expected to translate into higher taxes for the Government, improved public finances and a modest budget surplus next year.
On climate, the renewed push signalled in the wake of the recent COP26 conference in Glasgow and here by the arrival of Greens in Government and the State's first carbon budget seems to have been overtaken by the current energy crisis.
Ireland's reliance on coal for energy more than doubled last year, while wind's share of electricity generation fell, according to Gas Networks Ireland, while coal- and oil-burning electricity plants at Tarbert and Moneypoint may have to be kept operating beyond their scheduled closing dates to avoid power cuts.
Germany, meanwhile, is in the process of signing off on the Nord Stream 2, a pipeline that will increase Europe's reliance on Russian gas, in a move that seems to go against the European Union's stated objective of energy autonomy.
And while Brexit appears – at this stage – to have been less damaging than initially thought, with many firms merely incorporating it as an additional business cost or adopting workarounds, exporters here face additional checks on their products entering the UK from June. And that's before the full ramifications of the DUP's latest move to effectively dump the Northern Ireland protocol by halting checks at the North's ports plays out.
The EU is likely to warn the UK government to take charge of the situation or face punitive action.
The uncertain backdrop to the global outlook has roiled markets. US stocks appear to be flirting with a major correction on the back of disappointing company earnings and concerns about high inflation.
Speaking after the European Central Bank (ECB) kept its policy unchanged, ECB chief Christine Lagarde acknowledged that euro-zone inflation was running hotter than expected, adding that raising interest rates this year was "very unlikely" but left the door open for further assessment. That's a far cry from the more confident "transitory" verbiage of last year.
Calls by Bank of England governor Andrew Bailey for wage restraint all but torpedoed the notion that inflation would be temporary.
“We are looking to see quite clear restraint in the bargaining process because otherwise it will get out of control,” he said on Friday, while noting that higher energy prices will drive inflation until at least 2023. Either way, uncertainty clouds the outlook for 2022.