While the economic future is bright for the island of Ireland, we mustn't take it for granted. Neil Gibson outlines lessons learned from the last two years and what challenges lie ahead.

It is encouraging to report that the all-island economy ended 2021 in much better health than expected despite the economic and societal headwinds of the past 22 months. The economic rebound has been quick and substantive to date, driven by a combination of well-timed policy responses and the ingenuity and flexibility of the business base. The economy is dealing with labour shortages and price increases exacerbated by high demand levels. These problems can be viewed as consequences of success, but it does not make them any easier for businesses or policymakers to navigate.

The emergence of the latest COVID-19 "variant of concern" adds renewed uncertainty to the outlook as many unknowns remain about its severity and impact at the time of writing. The 2022 outlook for the Republic of Ireland (ROI) and Northern Ireland (NI) has been revised upwards from forecasts produced in spring 2021, with the labour market outperforming expectations. The pandemic has hastened a trend that has been gathering momentum – not all growth is equal. Purposeful growth that brings together economic, societal, and environmental development has become the goal for policymakers, citizens, and business leaders alike. The resilience and adaptability of the all-island economy will be tested further as the challenges of the "three Ps" – people, planet, and prices – move into sharper focus this year.

Can the headwinds become tailwinds?

The headline economic performance may be better than expected, but not all businesses are booming. The ever-changing nature of the virus, supply chain disruptions, and rapidly increasing prices all present significant headwinds for many companies. A strong labour market recovery amid a slowdown in migration also means that many businesses struggle to attract and retain talent.

The economic outlook appears much more daunting when these short-term challenges are coupled with the necessity to transform towards a more sustainable future. The evidence of the past 22 months has shown that the organisations that can turn these challenges into opportunities will achieve unparalleled success. Finding talent in new places, deploying technology to mitigate price increases, achieving sustainability goals through innovation, clear leadership, and targeted investment are all traits of businesses that have thrived in these uncertain conditions.

The critical question for the wider economic outlook is whether a sufficiently broad cohort of businesses can participate in this transformation.

Policy plan remains 'grow faster'

The UK and ROI budgets emphasised the need to keep public spending levels high to tackle ongoing pandemic issues and accelerate efforts to address significant societal, environmental, and economic challenges. The two most prominent issues set out in the ROI and UK budget speeches were climate change and housing. It was evident that the key policy choice is to raise taxation to meet spending rather than curb spending to match income. There were no widespread austerity measures put in place across either economy despite the levels of borrowing incurred due to the pandemic.

However, the UK did introduce two major tax increases to rebalance public finances and facilitate sustained elevated levels of public spending, increasing national insurance and the headline corporation tax rate. In ROI, strong levels of growth and tax receipts have safeguarded against any immediate tax rises for the time being. However, the OECD global tax agreement will modestly increase the corporation tax rate.

Reassessing risks is an imperative

Given the outperformance of the all-island economy, it may seem pessimistic to warn of complacency as a risk to economic growth. Still, as the emergence of Omicron demonstrates, it is essential not to take the strong recovery for granted in 2022. The availability of a seemingly endless supply of public money to deal with the pandemic, the assumption by most economists that inflation will be temporary, and the availability of low-cost finance are all open to challenge.

The public finances will need to be repaired, particularly if interest rates rise sooner rather than later. Traditionally, technology, global competition, and labour supply would mute prices. However, these assumptions are now being challenged as wages are rising and consumers are becoming more conscious of suppliers' ethical and environmental standards. Growth is always hard-earned, and the ingenuity and adaptability that has been evident across the island economy will be required again. As scientific evidence shows, there is very little calm after the storm, but at least the economy faces the challenges from a more robust platform than predicted.

Neil Gibson is the Chief Economist at EY Ireland.