THE YEAR AHEAD- SOME THOUGHTS ON 23

Appeared in Irish Examiner 29th Dec 2022 by Jim Power

As we look ahead to 2023, intense uncertainty seems to be the most appropriate description of what lies ahead. The global economy ended 2022 under pressure against a background of high inflation, rising interest rates, serious difficulties in the Chinese economy, and a general expectation/fear that the economies of the EU, the UK and the US could well experience technical recession in the first half of 2023. The most significant element of uncertainty revolves around the war in Ukraine and the lack of any obvious end to Putin’s military debacle. The key fear is that the war will just rumble on indefinitely and continue to wreak havoc with global food, fertiliser, energy and industrial metals supply chains. At a political level, the ongoing migration of Ukrainian refugees could become much more problematical for many governments who are struggling to deliver housing and other public services. Towards the end of 2022, we were seeing more disquiet in many countries in relation to this issue.

Inflation and interest rates will obviously dominate economic and financial discourse over the first half of 2023 at least. The easing of headline inflation towards the end of 2022 largely reflected the decline in oil and other energy costs, rather than an easing of domestically driven inflationary pressures in areas like services. The outlook for inflation in 2023 is uncertain. The hope is that energy prices will remain at least at current levels and possibly fall further, which would lead to a considerable base effect on the annual rate. However, central bankers will be keeping a close eye on second-round effects in areas such as services and of course wage pressures.

On the interest rate front, the Federal Reserve, the Bank of England and the ECB delivered rate increases of 0.5 per cent in December, but there is more tightening to come in 2023.

The Federal Reserve has made it clear that the monetary tightening has further to run. The central bank said that ‘ongoing increases’ in the policy rate would be ‘appropriate’ in order to ensure that the Federal Reserve is restraining the economy enough to bring inflation under control. For the moment the prevailing tone of the Federal Reserve is that the US economy will have to be squeezed further and the official forecast is for growth of just 0.5 per cent in 2023 and 1.6 per cent in 2024. This is very low by US standards.

For the Bank of England, the overriding fact is that inflation is still too high and demand in the economy is still quite resilient, so further tightening is likely in the early months of 2023. The markets are currently of the view that rates will reach 4.5 per cent.

The ECB also warned of further interest rate increases to come. Specifically, it stated that ‘interest rates will still have to rise significantly at a steady pace to reach levels that are sufficiently restrictive to ensure a timely return of inflation’ and that ‘inflation remains far too high.’ ECB rates are likely to rise by at least 1 per cent in the first half of 2023. Anymore than this would be dangerous and potentially very damaging overkill.

The bottom line is that we remain in a rising interest rate environment and the path and magnitude of rate increases from here will be determined by the trajectory of inflation, the performance of wages and labour markets, and general economic activity.

For the Irish economy, the prospects are uncertain, but it seems inevitable that growth will slow. Of particular concern are those sectors most reliant on discretionary spending and most exposed to spiralling business costs on all fronts. Hospitality, retail and personal services seem to be the most vulnerable sectors, and of course those sectors are dominated by SMEs. Government will need to support those sectors and not do anything stupid such as increasing the 9 per cent VAT rate at the end of February.

For the incoming Taoiseach, the biggest economic, social and political challenge has got to be the housing market. Every conceivable resource needs to be directed towards housing and responsibility for it should really be given to the Department of the Taoiseach. Only then, might it get the attention and sense of priority that it warrants.

Housing should be recognised as not just the most pressing social issue in the country, but also the most important element of national economic competitiveness. A very broad and very concerted effort needs to be made to increase the supply of all types of housing and to bring rents and house prices down as a matter of national priority. I am not optimistic that the problem will be solved anytime soon because there does not appear to be any long-term strategy for housing.