Cliff Taylor: There is no doubt that the Irish economy is at a turning point

How many euphemisms are there when people lose their jobs? We are hearing of rightsizing, recalibration and rebalancing as tech companies cut employment. Central Bank governor Gabriel Makhlouf said we are seeing a “pause” in the sector. The trouble with a big sector like tech is that if it is not moving forward, it is likely to go backwards, at least for a period.

It is hard to know how bad it will get for tech, but this has moved from collapsing market sentiment to real economic factors. Tech businesses are experiencing lower demand from consumers and from other businesses – just think, for example, of the impact of a consumer slowdown on companies selling online advertising and then on companies supplying to them. A negative cycle has taken hold which will, at best, take time to shake off.

The same up and down cycles tend to apply to economies – and over the years Ireland has been something of a Jedi grand master of the boom and bust cycle. In the 30 years before the pandemic, Irish economic growth was generally either storming ahead or in trouble. There were very few years of boring, 2 to 3 per cent economic growth.

The jobs market has been one of the most striking Irish economic successes. However, the big employment increase we have seen in recent years – interrupted by Covid – appears to be topping out

Now we are at a turning point again. The economy came through Covid-19 well and the recovery through 2021 was remarkable. But the cost-of-living crisis has taken an inevitable toll and so will the international slowdown – and knock-on factors like the tech wobble. The economic figures now indicate that the domestic economy is already being hit as consumer spending falls. Employment, one of the most vital and up-to-date indicators, appears to be topping out, notwithstanding the labour shortages in many areas, and retail spending is under pressure.

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There are a few negative cycles taking hold. The most obvious one is lower consumer spending in real terms as households are forced to divert more cash to essentials, leaving less for everything else. In turn this will affect employment – some of the small retail and hospitality businesses that just about made it through Covid will not survive another hit. There are some brave retailers opening new ventures on city streets, but there appears to be more shutting shop, closing some of their outlets or restricting hours even further. The latest figures from the Central Statistics Office suggest that employment in the accommodation and food sector is struggling, after a post-lockdown revival.

The jobs market has been one of the most striking Irish economic successes and CSO figures out this week show an increase over the past year of 3.4 per cent to a new record 2.55 million. However, the big employment increase we have seen in recent years – interrupted by Covid – appears to be topping out. What the balance will be in the months ahead will be important – and labour shortages in some sectors suggest the market has a bit of leeway. But lower consumer spending and troubled export markets – in other words lower spending by consumers and businesses we sell to overseas – are bound to take a toll. Like the tech sector, we are no longer talking just about sentiment here, but also about real economic forces.

The Irish economy had a few years pre-Covid when it had just about everything going in its favour. Interest rates were on the floor, allowing a massive and beneficial restructuring of State and household finances. For a range of reasons massive investment was flowing in from the tech and pharma sectors. A change in international tax rules in 2015 played hugely in Ireland’s favour. Overseas markets were generally healthy and the world was, in today’s term, calm. This allowed a big increase in employment – by more than 650,000 over the past decade. Corporate tax revenues flooded in.

The turn in the economy shows that some of these winds have turned against us. Interest rates are rising much more quickly than would have been anticipated at the start of the year and we are only starting to see the impact on borrowers. The world economy is in trouble. The tech sector, one of the two big pillars of our foreign direct investment, has hit a bump, even though the other big engine – the pharma sector – motors on.

2023 looks like a tight year economically and that will have its political consequences

This slowdown comes after a period of economic overheating – reflected most obviously in the housing purchase and rental market but also in inadequacies in areas like healthcare and shortages of school and creche places. It remains to be seen how much these key pressure points now ease. However, the outlook for housing, in particular, remains fraught with danger as rents soar, landlords flee the rental market and the economics of building new apartments and houses gets more difficult as interest rates rise.

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The economic slowdown will frame the run in to the next general election, due in 2024. The battle lines are already drawn, with the Government saying that a Sinn Féin-led government would upend the economic progress of recent years – as shown most clearly in the jobs market – and Sinn Féin saying that only they can deliver the vital “change” needed in areas like housing. Slower growth will sharpen this debate – a lot. The Government will be on the defensive, unless it starts to get a better grip in areas like housing. And slower growth means fewer resources and increases the need to make choices.

The best hope for the Coalition is that the underlying strengths in the economy and perhaps some easing in the relentless bad economic news internationally limit the damage and mean that the domestic economy stalls rather than heads downwards. There is a chance that this can happen. The big imbalances that turned the financial crash into such a painful episode are not present this time.

But 2023 looks like a tight year economically and that will have its political consequences. “Change” – whoever delivers it – costs money and there will be less of it about.