In this blog by NERI Co-director, Dr. Tom McDonnell he discusses his latest NERI Report Series paper no.12, 'Economic Trends and Outlook: In recovery but more challenges ahead'.
The Irish economy has almost certainly exited the worst of the crisis and its recovery is now picking up steam. The strong countercyclical response taken by fiscal and monetary policy has broadly protected household incomes and the productive capacity of the economy. This in turn has enabled a sharp economic bounce-back. While the latest round of Covid restrictions will delay the recovery for some service industries, the short-to-medium term economic and labour market outlook is generally bright.
There are of course a range of threats to this outlook. Examples of important risks include:
(A) repeated and prolonged Covid related restrictions;
(B) a continuation of global supply constraints,
(C) rising inflation and a tightening of monetary policy in the euro area or in the US,
(D) further Brexit and trade uncertainty, and even
(E) A potential slowdown in the Chinese economy.
Even so, our view is that rapid economic growth should manifest itself in 2022 through the release of pent-up consumer spending and through strong growth in domestic investment. The unemployment rate should be close to its pre-pandemic level by late 2022 and dip below 5% in 2023. The ongoing labour market tightening suggests significant potential for wage growth in certain sectors.
The trajectory of price inflation is uncertain. Our view is that inflation, while remaining elevated in the first half of 2022, is likely to dampen in the latter part of next year as base effects in energy prices work through the system, as supply chain issues ameliorate, and as spare capacity builds up. We expect inflation to be running at close to 2% by this time next year.
However, policymakers will need to grapple with many significant long-term challenges in the years ahead such as changes to international trade and taxation, an ageing population, digitalisation and automation, the affordability of housing and childcare costs, labour market precariousness, and of course the economic transformation required to achieve the zero carbon transition.
The zero carbon and digital transitions will cause significant changes in the architecture of the economy and in the composition of the labour market. Even so, these transitions nevertheless offer great opportunities for economic development. Policy will need to facilitate and ease these changes via just transition supports and via higher levels of per person investment in education and training including in digital literacy, via greater investment in green technologies and infrastructure, via measures to support the economy’s innovative capacity, and via steps to eliminate barriers to labour force participation, for example the cost of childcare.
Finally, the pandemic has re-established the indispensability of public services and the welfare state. Meeting the costs of rising to these future challenges will require significant reform to the state’s revenue raising capacities over the medium-term.