Cliff Taylor: Threats facing economy now could put Covid in the shade

The economy is a lot more solid than it was in 2008, but dangers abound

How on earth do we make sense of what is going on? We are facing the biggest cost-of-living crisis in a generation, businesses are being squeezed by soaring costs and wage demands and yet the economy is flying. Unemployment has returned to post-crisis levels, consumers continue to spend, there are thousands of vacancies and house prices continue their seemingly relentless upwards rise.

Part of this relates to the resilience of the economy, demonstrated through Covid-19. Helped by government supports, households and businesses emerged from this in better shape than expected. The multinational sector kept going and benefited from a global post-Covid rebound. The economy entered 2022 in remarkably good shape.

Then Russia invaded Ukraine and the inflationary crisis got a lot worse very quickly. So are we now like the Road Runner, with our legs moving fast but already over the edge of the cliff and heading for a big fall? Not yet. The economy can’t defy gravity. So the international slowdown now under way will hit here and the growth rate will slow later this year and into 2023. Inflation will spread and remain a big issue. That much now seems clear.

Whether we are heading for something worse largely depends on the course of the war and its wider economic impact. Nobody knows how this will go. If you wanted to put forward a negative scenario, it would involve gas supplies from Russia being cut off suddenly and the EU falling into recession. World stock markets are now clearly reflecting worries about a sharp slowdown, at least.

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

There is a lot of uncertainty around, but not a lot of clarity. We have some vital buffers. The economy is a lot more solid than it was the last time real trouble hit in 2008. Many consumers – mainly better-off ones – have a lot of cash in their bank accounts. We do not have the kind of credit bubble that exploded so spectacularly back then. The arrival and expansions of a phalanx of knowledge-industry companies has boosted jobs and tax revenues.

But economic growth will start to slow. Part of the contrast between current economic data and increasing inflationary pressures is down to timing. Small businesses are busy trying to cope with rising demand and increasing costs, but consumer spending will be affected later this year as the cost of living squeeze lingers.

Slowing investment

Big multinationals have their budgets for this year and many are expanding. But new investments – the ones for late this year and into 2023 – are now being put through the wringer. Some are being put on hold. Fears of an international slowdown together with rising costs across the board are coming into play.

Something similar happened at the start of Covid-19 – a kind of foot on the economic brake as everyone waited to see what would happen. The accelerator was soon pressed to the floor again in many sectors – and others have rebounded with the reopening. But what is happening now may pose a bigger threat. The pandemic hit the consumer-facing sectors – the energy crisis and its inflationary fallout are hitting across the board.

It is a difficult situation for the Government to manage, with demands for wage increases in the public sector building, ongoing pressures on spending elsewhere – added to by inflation – and on the flip side risks to tax revenues if growth slows. The problem is negotiating for tomorrow on the basis of today’s very buoyant revenues.

This has led to an intricate dance, with suggestions that some form of "social partnership lite" might be revived, with other factors apart from wages included in talks between employers, unions and the Government. Taoiseach Micheál Martin seemed to want to "put the band back together" on partnership, as one source put it, and trade unions are also hinting that progress in areas such as healthcare and childcare could be part of a package to emerge from negotiations.

But others in government are cautious and there is an argument that the forum in which all this has been raised – the Labour Employer Economic Forum – is appropriate for workplace issues as it includes employers and unions but not for wider policy questions. Where the line is drawn here is debatable, of course – the latest forum minutes published are for summer 2019, but we know it has already strayed into territory such as the impact of childcare on employees.

Clearing houses

Of course, employers and unions want as big a say as possible. But the wider this goes the more demands will grow from other groups to be represented. And a return to the large plenary forums of the glory days of partnership, with the goodies divided up between those around the table, would not be a wise idea. Also, trade unions now represent a smaller share of private-sector staff than they did when partnership kicked off in the late 1980s.

This will get shouty and difficult politically. For now the Government needs to use tax revenues wisely

That said, it is good to talk, as the old saying goes, particularly given the uncertainty now facing the economic outlook. As during Covid-19, when the forum played a role, clearing houses can be useful to allow things to be done quickly and to try to head off problems. And there are many key issues that do relate to the workplace, the Government’s agenda in areas such as sick pay, pensions and entitlements and how this is all paid for.

Holding things together will not be easy. The cost-of-living pressures will grow, a successful public pay deal is far from certain and many private sector employees are also being heavily squeezed. This will get shouty and difficult politically. For now the Government needs to use tax revenues wisely, continuing to build up the contingency funds we have seen in recent years. This will allow it plan for a likely slowdown in growth – and if worse comes it will at least have some vital room for manoeuvre.