EXAMINER PIECE 26th DEC 22

THE YEAR JUST PAST

The word ‘polycrisis’ seeks to describe multiple cascading shocks. Since March 2020, that word seems to fit perfectly the world we have lived in. We have lived through and continue to live through the pandemic, the Russian invasion of Ukraine, damaged global supply chains, the resurgence of inflation after three decades of dormancy, and aggressive interest rate tightening, albeit from historically low levels. All of these shocks are heavily inter-related but they really cascaded in 2022 and delivered a year that will live long in the memory, but one that many around the world will want to forget.

In the second half of 2021 as a strong post-Covid demand rebound came up against serious supply constraints, inflation took off. Initially, the consensus view, particularly amongst central bankers, was that this inflation surge would prove transitory and that as 2022 progressed, demand would normalise, global supply chains would free up, and inflation would ease. Central bankers did not believe they would have to do very much in the way of interest rate tightening. They were very wrong.

This ‘transient’ view of the world was completely blown out of the water on February 24th when Putin invaded Ukraine. From then on, the impact dominated everything. From an economic perspective, the key impact of the illegal invasion was felt through escalating energy prices; serious disruption to the global food supply chain and rapid food price inflation, which had lain dormant for decades; and serious disruption to fertiliser and many industrial metals supply chains. In short, the Ukraine crisis landed at a time when the world was seeking to emerge from the pandemic, and significant economic and financial dislocation was the result.

Inflation dominated the economic landscape during 2022, although there were some signs of easing towards the end of the year as energy prices slipped back. The annual rate of inflation in the UK eased to 10.7 per cent in November from 11.1 per cent in October, which was the highest rate since October 1981; the annual rate in the Euro Zone eased to 10 per cent, down from a record high of 10.6 per cent in October; and the annual rate in the US eased to 7.1 per cent, down from 7.7 per cent in October.

Despite the easing in the headline inflation rate, central bankers ended the year in tightening mode. In December, the three key central banks opted for 0.5 per cent increases, rather than the 0.75 per cent increases of recent months. Between December 2021 and December 2022, the Bank of England increased rates nine times taking the base rate from 0.1 per cent to 3.5 per cent; between July and December the ECB increased interest rates four times, taking the key rate from zero to 2.5 per cent; and between March and December the Federal Reserve increased rates seven times, taking the Federal Funds rate from a range of 0 to 0.25 per cent to a range of 4.25 per cent to 4.5 per cent. It was quite the year for interest rate tightening.

Against this background of spiralling inflation, rising interest rates and intense uncertainty, the global economy lost considerable momentum, but not as much as might have been expected. One of the somewhat surprising features of many economies in 2022 was the resilience of labour markets in the face of immense challenges. The US unemployment rate is hovering at a historically low level of 3.7 per cent of the labour force; the UK rate is 3.7 per cent; the Irish rate is 4.4 per cent; the German rate is 5.6 per cent; and the Euro Zone rate is at a record low of 6.5 per cent. Labour shortages and upward pressure on wages remain a marked feature of the business environment both in Ireland and in many international economies.

One of the most extraordinary events on the political front was the implosion of UK financial markets following Kwasi Kwarteng’s mini budget. A massive fiscal stimulus package funded through borrowing did not go down well and quickly led to the demise of the Chancellor and the Prime Minister. But for the intervention of the Bank of England, the consequences for UK pension funds and UK financial markets generally could have been catastrophic. Since the Brexit vote in 2016 the UK has provided a strong case study demonstrating how mad politics can have such devastating economic consequences. Ireland would do well to learn lessons from the UK experience.

Despite the very negative global economic, financial and political headwinds, the Irish economy performed very strongly in 2022. A record level of employment was achieved; the unemployment rate was virtually at full employment levels; remarkable tax revenue buoyancy delivered a strong Exchequer surplus and facilitated a very expansionary budget package of €11.3 billion; the IDA had another very successful year in attracting FDI; and down on the farm, incomes increased by over 30 per cent. On the downside, the housing market remained in crisis, as manifested in spiralling rents and house prices, and business and consumer confidence suffered. All in all, though, 2022 was a good year for the Irish economy despite challenging negative developments.