Five economic hot spots to watch in 2022

Covid’s economic rebound is now well underway, but heading into 2022 the outlook is still clouded by new risks from new variants, concerns about slowing global growth, uncertainty about inflation. and more Brexit trade frictions. The only thing for sure is that the issues that dominated in 2021 appear to be back in the spotlight. Here are five potential flashpoints.

Inflation and the compression of the cost of living?

The biggest global economic debate right now is whether the current acceleration in price growth and the ensuing compression in the cost of living are – as central banks keep telling us – transient, a product of the post-Covid reopening of economies or something more protracted, something that could usher in a new era of higher interest rates.

Our entire financial ecosystem – stock markets, corporate earnings, government bonds, mortgages – relies on low interest rates, and a big change could have far-reaching consequences. Deutsche Bank warns that a period of rate hikes could wreak havoc in a “heavily indebted world”, causing financial crises in emerging economies.

Prices have skyrocketed in recent months on everything from home heating and fuel to hotel rooms and airline tickets, fueled by a massive surge in global energy prices, a rebound in energy prices. consumer spending and supply chain bottlenecks after the lockdown. Brexit bureaucracy is also a factor.

Irish inflation has now reached a record high of 5.3% in 20 years, while in the United States it is above 6%, the highest level since 1982.

US Federal Reserve Chief Jerome Powell has – in recent weeks – signaled a shift in the Fed’s thinking on the issue. He said it was probably time to “remove” the word “transient” from describing inflation, while suggesting that the Fed could speed up its unwinding of bond purchases that have helped keep costs down. ‘low long-term borrowing.

A faster cut could set the stage for an interest rate hike that will dampen inflation as early as the first half of next year – rather than the second half as previously expected. Some say the market is already factoring in two U.S. interest rate hikes in 2022.

The European Central Bank (ECB) tends to be less responsive and has so far ruled out an interest rate hike in 2022. Whether the current inflation spurt turns out to be harder may depend on wage growth. If wages start to rise as workers demand better compensation for the current compression in the cost of living, it could trigger a wage-price spiral, leading to a more prolonged rise in prices.

There is also a school of thought that thinks that the two-decade-long drew-to-the-bottom globalization that effectively exported price growth may be over as companies rethink their supply chains and consumers demand greater ESG. standards (environmental, social and governance). The debate has begun.

Escape the cycle of on-off restrictions

Predicting the end of the pandemic has – to date – turned out to be a joke. We are now officially in the fourth wave of the virus, with the appearance complicated by the emergence of new potentially more transmissible strains.

Another complicating factor is the large differences in vaccination rates between countries. The Organization for Economic Co-operation and Development (OECD) has warned that vaccine inequality – especially in low-income countries – is fueling new outbreaks, which add to the uneven recovery of the global economy.

Economic normalization remains vulnerable to further restrictions as viral variants challenge public health systems. Breaking out of this cycle of on-off restrictions is a key challenge for 2022 and an essential condition for companies in consumer-oriented sectors.

On the positive side, the severity of the virus continues to moderate as treatments become more effective. Pfizer and BioNTech say their booster shot promises to be an effective defense against the Omicron variant. Hopefully the era of circuit breaker blockages is behind us.

As Ireland experiences exceptionally strong growth fueled by an increase in overall income and the unwinding of foreclosure economies, risks to consumer sectors from new restrictions and tighter messages about social distancing have increased. This indicates a K-shaped recovery, with much of the economy returning to the job-rich growth we had before the pandemic – the Central Bank predicts that up to 60,000 jobs will be created over the next two years – while the worst – affected areas take longer to recover.

The renewed restrictions are expected to see a temporary slowdown in the recovery in the latter part of 2021 and the first quarter of 2022 with acceleration again in the spring. This is not the first time that the economic outlook has been linked to epidemiology.

Remove media and zombie companies

Covid has ushered in a new era of crisis management, with wage supports deployed en masse to protect the economy from the worst of the blow. Such measures stand in stark contrast to the austerity imposed following the 2008 crisis, which worsened the fall in demand.

However, weaning the economy and businesses from these supports – a fiscal imperative from the government’s point of view – could prove tricky. The government has already had to reverse a cut in the Employer Wage Subsidy (EWSS) scheme, which it plans to phase out by April. Finance Minister Paschal Donohoe said the government could not design a targeted program for the hospitality industry in time for Christmas and therefore chose that route instead.

Wage supports have been essential in maintaining the link between employers and employees and it is crucial that the government avoid a sharp fall by removing these safety nets.

They are expected to be in place longer than April, the current end date, but on a more focused basis. That said, the end point will require dooming indebted zombie companies – those kept alive by supporters – to oblivion, an inevitable aspect of the current crisis. Many fear that the true extent of this will be known before the tide of support ends.

An internal government memo warns that tens of thousands of jobs could be lost if the EWSS is cut in April.

Regardless of the backers, Irish Small and Medium Enterprises (Isme) chief executive Neil McDonnell has said he expects bankruptcies to increase in the first quarter of 2022.

“We expect the action to kick off in the first quarter as the Christmas restrictions will have changed the math for many businesses, especially in hotels, restaurants, pubs, music and entertainment,” did he declare. “For the record, we’ve heard that many companies plan to trade as hard as they can for December and then shut the doors before the January-February VAT bill is paid. The new restrictions have changed those plans, ”McDonnell said.

One bright spot is that the better-than-expected government tax and deficit figures, which are expected to continue into 2022, allow the state to continue supporting struggling sectors and businesses.

Brexit and unfavorable trade record

If the past is the best predictor of the future, we will likely see more friction between the EU and the UK over post-Brexit trade deals, but the avoidance of a serious breakdown in relations. The two sides are trying to reach an agreement that would reduce customs controls on goods transported from Britain to Northern Ireland – seen as the main flaw in the current deal – and ensure the free flow of medicines through the Irish Sea.

The UK government has warned that it will trigger Article 16 of the Northern Ireland Protocol if no progress is made, although reports earlier this month suggested that the ECJ issue had, for the moment, been taken off the table by the British side.

Article 16 is the legal mechanism for the UK or the EU to take unilateral action if they believe the deal has caused “serious economic, societal or environmental hardship” or “trade diversion” .

In response to a UK trigger of Article 16, the EU could end the Brexit trade deal, sparking a trade war between the Union of 27 countries and its former member.

So far, the worst-case scenarios have been avoided, but such a brutal outcome remains a risk. Brexit has had an impact on trade between the Republic and Britain, but much of it is embroiled in the pandemic and it may be some time before we have a clear picture. As imports from Britain fell, the value of the Republic’s merchandise exports to Britain rose, although pandemic base effects were also behind these figures.

The other big change is the resumption of North-South trade. Much of this trade could be diverted, as companies use the North as a channel to move goods between the Republic and Britain.

Despite technology and the removal of trade restrictions across the world, studies continue to show that geographic proximity and economic size are still the dominant factors in the structure of trade, even in services. As a result, the UK will remain a dominant export destination for many Irish companies despite Brexit and despite our economic ties with the US.

Soaring house prices and rents

A central question is whether a construction rebound implicit in the government’s housing for all strategy, which promises 33,000 homes per year through 2030, will lead to a shift in the increasingly strained housing dynamics in Ireland .

Housing demand has strained a declining supply of available housing, pushing up prices and rents. Real estate website Daft.ie said there were only 1,460 units for rent on its website as of November 1, the lowest number since the start of its quarterly series in 2006. That included just 820 at Dublin.

The Central Bank also warns that significant public spending on housing over the next few years could face capacity constraints, mainly related to a labor shortage, which could fuel further inflationary pressures in the economy. sector.

Two fundamental forces are fueling the crisis here: supply and prices. One is too low, the other too high. Government and industry are banking on old supply and demand laws to solve the price problem, but there is little evidence that the housing market is complying with these laws.

It is almost certain that an increase in supply and a decline in demand for housing induced by Covid will moderate current levels of price and rent growth over the next few months, but the affordability gap at the heart of the equation is unlikely to change much, suggesting housing is expected to remain one of the major economic and political hot spots in 2022.