Prepare for the post-containment boom. Much of the economy is already growing strongly and reopening sectors will now rebound, even if they will not return to their pre-pandemic position. There are signs of labor shortages and wage pressure in some sectors. Tax revenues will end the year ahead of target. Even the aviation industry is showing signs of life.
It is difficult to judge to what extent what is happening is due to a rebound in pandemic closures and what the long-term sustainable growth is. But many sectors that worked during the pandemic continue to do well. Recruiters are reporting job shortages and wage pressures in industries such as tech, parts of the financial industry and newly challenged HR departments.
This is in part due to a lack of inland migration during the pandemic. But underlying growth also appears strong in sectors dominated by multinationals. And there are also signs of a recovery in the domestic economy as restrictions ease – with more to come. The future of sectors dependent on tourism, hospitality and indoor performance remains difficult and difficult to predict. Many former employees will not be returned to their jobs. But for the moment the trajectory, post-containment, is ascending. Consumer spending is now rising sharply as restrictions are lifted, as the latest economic data confirms.
This is of course encouraging. The pandemic is not over, but the economy is faring far better than anyone might have expected had we known that large parts of the economy were going to remain closed for so long. The outlook for the two budget ministers – Paschal Donohoe and Michael McGrath – is that the public finance figures for this year will exceed the target. The problem for them, of course, is that this will only increase the pressure to keep spending – or keep increasing spending.
Public spending skyrocketed during the pandemic as emergency supports were put in place, financed by massive borrowing. He was the right thing to do. But now, as those supports are withdrawn, some of the money is redirected to spending increases in the years to come, both in investments and in day-to-day spending. The budget forecast has already been redesigned to allow borrowing to remain higher than initially indicated in the coming years to finance this.
The coming mini-boom, with the reopening of the economy, will stimulate the chessboard. All political attention is now focused on spending – on housing, post-pandemic supports, health and a massive investment program slated for the next few years, which will also have a heavy climate change bill.
While the near-term outlook is for an economic rebound, beyond that, decisions will be needed. Expenditure commitments are piling up. Economic growth will hopefully pay off a lot in the years to come. Along with the expectation of rock bottom interest rates, this has led to a political debate on how all of this will be paid.
And there are also threats. One obvious question concerns corporate tax revenues, where a major international reform program is currently under discussion. A drop in revenue here – responsible for one in five euros of tax collected – is already included in the budget forecasts for the next few years. But we really don’t know where it will end up or what it will mean for our public finances.
The other big question is the policy of the European Central Bank (ECB). One of the great economic debates internationally is how central banks should behave in a post-Covid world. Should they continue to support public spending when needed, or return to a more traditional role of prioritizing inflation? And inflation is now making headlines, with eurozone prices rising 3% over the past year, the fastest increase in a decade. The story is that this is temporary – in large part due to rising energy prices – and will disappear from the system within the next year or so. But we just don’t know – and consumer spending and wage trends will be vital.
On both sides of the Atlantic, central banks are discussing how and when to start massively cutting government bond purchase programs, which have allowed countries to borrow at zero or sometimes negative interest rates. . Around the ECB table, a group led by Germany is arguing for a rapid liquidation so as not to take risks with the integration of inflation. ECB policy is expected to remain favorable next year, but beyond that we just don’t know.
For now, investors can lend money to countries, knowing that the central bank will buy the loan if they want to offload it. Once these stabilizers are lifted, investors will look more coldly, depending on the sustainability of the public finances of the various countries. The premium charged to riskier countries will increase – perhaps quite sharply. This is why Ireland wants to continue borrowing at a level similar to that of other countries in the euro area – so as not to appear out of sync and to be able to continue borrowing at low interest rates. It will be a delicate balance.
This is what will start to drive decisions in Ireland for too long. Central Bank Governor Gabriel Makhlouf was the latest to point out this week that permanent, long-term spending increases must be funded by new taxes. Or the expenses may be reduced elsewhere, although this does not seem likely. It’s not austerity, it’s just common sense. Funding the massive commitments that now await us is a debate that has been postponed during the pandemic. But it cannot be put on the long finger forever.
The near-term economic outlook is encouraging – under the circumstances – and we are heading for a rebound. It’s as good as you’d expect, given what we’ve been through. But big decisions lie ahead, which will spark a furious debate both within government and through politics.