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Monday 6 February 2023 Dublin: 5°C
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VOICES
Analysis Are we headed for recession? Does it matter?
Economist Victor Duggan says there’s talk of the ‘R’ word everywhere, but we might just avoid it if the many global storms settle.

THE ‘R’ WORD is being bandied about a lot these days. Are we really headed for recession? And, does it matter?

Economists on this side of the Atlantic use a simple rule of thumb to determine whether there has been a recession or not: if the economy shrinks for two quarters in a row, then we can use the ‘R’ word.

By that definition, the US suffered a recession in the first half of 2022. But, for all the worry there might be a recession on the horizon, nobody really thinks they had one this year. Partly that was a statistical fluke, but also more confirmation, if we needed it, that GDP on its own just isn’t a great indicator of economic health. In the US they use a more complex, subjective and appropriate range of indicators to judge whether the economy is in recession or not. They look at personal income, consumer spending, employment and industrial production.

Can’t miss the slowdown

What is crystal clear is that economic growth is slowing dramatically. Everywhere. Some European countries, particularly exposed to the fallout from the Russia-Ukraine war, may already be in recession. Others are sure to follow. The Bank of England thinks the UK is on the verge of – or has already entered – its longest ever recession, about to suffer years of minimal or negative growth as the full cost of Brexit becomes apparent.

Ireland is in a stronger position. Taken as a whole, our economy has proved highly resilient in recent years, taking Brexit, Covid and surging interest rates in its stride thus far. As mentioned, GDP is rarely a great measure of economic health or social conditions, least of all in Ireland. The Modified Domestic Demand indicator that Irish economists have developed to strip out some of the most egregious statistical noise caused by multinational activity is a better proxy, but still imperfect.

Ireland is highly unlikely to see the jaw-dropping economic shrinkage of 2008-2009, and there is even a good chance we avoid a ‘technical’ recession by not registering two sequential quarters of negative growth in 2023.

Let’s look first at the jobs market. Having trended lower since mid-2020, the live register jumped in March 2022 but has flatlined since. This could result from issuing a large number of PPS numbers to new arrivals from Ukraine. The unemployment rate only ticked up marginally, from a post-pandemic low of 4.2% in early summer to 4.4% in November. That’s close to what economists would call ‘full employment’: with the exception of a few years in the early part of the century, Irish unemployment has never dipped below 4%. The share of men working is its highest since 2008, just short of its all-time high, while a bigger share of women is working since the pandemic than ever before.

Job vacancies also spiked post-Covid and haven’t fallen back. So, even if the total number of people at work has fallen slightly since April, this may well have more to do with sector-specific staff shortages than a weakening jobs market. Hourly earnings continue to accelerate, increasing by 3.5% in the year to end September. Our jobs market still seems to be in rude health.

Inflation

But, labour market data are what economists call ‘lagging indicators’. Employers tend to hold off on hiring and firing as long as possible, so it’s only when a recession is fully underway that you’re going to see a spike in the unemployment rate, for example. What do the other indicators say?

Having been ignored for decades, inflation became the indicator to watch in 2022. We only notice it when it’s high. We can tentatively say that the rate of consumer price increases peaked in the second half of 2022, at just under 10%. As global economic growth slows, and the accumulated effect of interest rate rises take their toll, economists expect inflation to fall back further in 2023.

The key determinant of living standards is not the price of goods and services, but whether our incomes are increasing faster or slower than that. If hourly earnings are increasing at 3.5% a year, but inflation is around 9%, then disposable income is shrinking significantly in real terms. Retail sales jumped in June 2021 as most Covid restrictions were phased out, but they’ve been trending lower since as everyone feels the pinch.

Even if wage growth stays high, and inflation falls back as expected, average living standards will continue to fall in 2023. They are falling at the fastest rate since at least 2008-9, even if Covid savings and sticking-plaster government supports have helped cushion the blow.

The point is this: the Irish economy may or may not enter a technical, or statistical, recession some time in 2023, but just like wind chill can make it feel colder than what the thermometer says, for most of us it already feels like a recession. At some point, as the economy slows further in 2023, we are likely to see an uptick in unemployment, a slowdown in wage growth and a drying up of job vacancies.

Inflation outpacing income growth grinds living standards lower for all of us, driving some of us into poverty. By their very nature, job losses are felt most by the individuals involved. If long-lived, they can be devastating, hitting not only our back pockets but knocking peoples’ dignity.

We need to hope global economic currents are mercifully benign in 2023. We need to insist government puts more emphasis on lasting solutions to the living standards crunch – as well as tackling the perma-crises in health and housing – and less emphasis on the sadomasochistic fiscal fetish of super-sizing the budget surplus.

Victor Duggan is an economist. 

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