What is the reality of the economic rebound?
The economic rebound is on – and it’s beating what almost everyone expected. A straw poll of businessmen tells the story – “stealing,” says a senior banker; “Generally very positive,” according to a business lobbyist; “Never busier,” says a recruiter; “Crazy” says a seasoned lawyer.
The economic forecast for this year is revised up – for the second or third time in most cases. “The Irish economy is recovering rapidly and national economic activity will reach its pre-pandemic level by the end of this year,” according to the latest forecasts from the Central Bank. Most forecasts now predict underlying economic growth – when volatile factors related to multinationals and aircraft leasing are excluded – of around 5.5-7% this year.
Clearly, this is largely a rebound from the all-time high of 2020 and the ongoing restrictions that continued through 2021. Multinational exports have supported activity and tax revenue during the worst of the pandemic – it continued and now consumer spending is firmly on the rise. The return to pre-pandemic activity levels in 2022 would be six to nine months ahead of what could have been expected, and justifies the strategy of strengthening the economy with massive support.
But a once-in-a-lifetime economic shock inevitably leaves great challenges behind. Companies have been hit by severe labor shortages for a range of jobs, and some in low-margin industries fear the impact of this, especially since wage subsidies introduced during the crisis are removed. Disrupted supply chains and soaring energy prices add to inflationary pressures. The rebound is underway, but these are significant challenges.
For now, the level of what economists are calling “scars” – the injuries that remain after the worst of the pandemic has passed – appear to be lower than expected. And growth prospects through 2022 will be supported by a continued increase in consumer spending – fueled in part by Covid-19 economies – and strong exports.
It’s a favorable backdrop for the two Budget ministers, Paschal Donohoe and Michael McGrath, who stand up to deliver their packages on Monday. The budget deficit this year will be well below the expected level of 20 billion euros, although it will remain a high figure. The two ministers carried out the traditional two-step pre-budget, telling the public that the economy is strong while trying to persuade their cabinet colleagues that there is no extra money to spend.
Since a large increase in spending is already written into the budget amounts, this is a reasonable strategy, allowing money to be set aside in a contingency fund for the next year. The additional planned spending, including a strong upturn in government investment, is already significant.
The Irish Tax Advisory Council, the budget watchdog, has said current budget plans are on the borderline of what is prudent. ESRI and the Central Bank warn of the dangers of overheating certain sectors of the economy. Donohoe and McGrath’s message is that, having moved this summer to allow for more spending over the next few years, they’re not going to change that approach.
During the pandemic, there was much discussion in Ireland and internationally about the likely form of the economic crisis and the subsequent recovery. Many have opted for a “K-shaped” outlook, indicating that part of the economy will hold up and rebound quickly while sectors affected by the restrictions suffer longer.
The hope now is that parts of the economy facing real, long-term damage will be weaker than previously feared, meaning that the increase in unemployment will not be so severe. But those who work in these sectors warn of a severe squeeze on margins due to rising costs and, in particular, wages. These companies survived the pandemic, but are not sure what will happen next.
On the positive side, spending is increasing, fueling a strong year-end. “High-frequency economic data now suggests the Irish consumer economy is returning to activity levels last seen in the pre-Covid era,” according to Ibec’s chief economist Gerard Brady. “These trends will become more and more enduring as we see a sustained reopening of the economy in the months to come.”
This is reflected throughout the company. Ian Talbot, managing director of Chambers Ireland, the umbrella body for the country’s chambers of commerce, points to “generally surprisingly positive” reports from across the country. There are clear signs of a recovery in the retail sector, with some major centers reporting footfall before the same period in 2019. So far, Talbot has not reported any major signs of a resumption in layoffs after the recent announcement that these could continue. again, although the post-pandemic debt burden and the phasing out of emergency aid will be a test in the months to come.
In the real estate market, transaction levels have returned to pre-pandemic levels. with Marian Finnegan, managing director of real estate agency Sherry FitzGerald, noting strong demand in the market, although a lack of supply remains critical to pushing up prices. The number of home sales in the first half of the year amounted to 24,300, excluding block sales or sales to local authorities, an increase of 29% compared to the same period in 2020 and of 1% compared to the first half. 2019. will monitor the terms of the promised extension of the purchasing aid scheme in the budget.
Meanwhile, across professional services and financial industries, the general reaction is that business is ‘at the door’, although attracting and retaining staff is a key issue. “Activity levels are high across the company – very strong growth reflecting the rebound shown in national economic figures,” said Feargal O’Rourke, Managing Partner of PWC. “The place flies” was a concise summary from a senior banker. “It’s crazy,” said a senior lawyer.
Talking to companies about their concerns, staff shortages, pricing pressure issues and supply chains are now the main issues. Labor shortages and wage pressures are evident throughout the economy, well-paying skilled jobs in engineering, technology, science, data analytics and engineering. cybersecurity in low-wage positions in the retail and hospitality industry.
The big question is whether this is a short-term phenomenon upon exiting the pandemic or a longer term one. There are signs that some people reassessed their jobs during the pandemic and retrained – or retired – while others have returned to their home countries and have not returned. More than a third of people on the PUP payment were looking for work in August, according to research from Indeed, the jobs website. But jobs are 37% ahead of pre-pandemic levels, and tourism and hospitality are facing what Indeed economist Jack Kennedy called an “acute staff shortage.”
Angela Ruttledge, co-owner of Olive’s Room restaurants in Raheny and Monck’s Green in Phibsborough wonders if the economic rebound is sustainable.
“Labor shortages and accommodation costs are driving wages up dramatically,” she says. “Our labor costs have increased by 20% from pre-pandemic levels. Despite this inflation, no member of our team who works full time and rents is benefiting from these increases, so I am concerned about the widening gap between different sections of the workforce. There is a rebound for some but not for others.
Ruttledge is hoping for some relief for lower paid employees in the budget and an extension of the 9 percent VAT rate for the sector and expresses concern about the withdrawal of wage subsidies later this year and believes they should be extended.
“Hospitality companies will be under great pressure to increase prices in line with these wage increases, especially after the withdrawal of wage subsidies,” she said.
Ian Talbot of Chambers Ireland says shortages are now emerging in the economy, while broader supply chain issues – shortages of product, packaging and increased costs – are big issues.
This is part of a picture of uncertainty resulting from the pandemic, reflected in energy markets and in many industries.
“Rising costs in areas such as transportation, energy and raw materials reflect major pressures on supply chains as the global economy reopens Covid-related restrictions,” said Brady of Ibec . While some of them may subside over time, he says, the risk is a “permanent increase in the cost base and uncertainty about profit margins” and competitiveness.
So, the story of a surprisingly strong economic rebound carries risks ahead. The resurgence of inflation – which has been dormant for so long – and pressures on wages and costs present the government with a challenge of a kind it has not faced in many years. Government supports seem to have gotten many companies through the past 18 extraordinary months, but they cannot last forever.
Now the challenge, with the introduction of a new corporate tax regime, is to keep the show on the road as we return to some sort of normalcy.