Report summary: How people, prices, and planet will shape the all-island outlook

The latest EY Economic Eye Winter 2021 report shows that the island economy ends the year on a stronger platform for growth than was projected despite the economic and societal headwinds of the past 21 months. The remarkable labour market performance reflects a combination of swift policy response, and a resilient and adaptable business base. However, the sustained high level of COVID-19 cases, rapidly rising inflation, a tight labour market, and the partial reintroduction of restrictions on hospitality and travel present strengthening headwinds for the remainder of Q4 and into the new year.

The ingenuity and resilience demonstrated by businesses across the island will be required again as further challenges emerge in 2022. A combination of rising prices, talent shortages, a need to move more urgently on environmental issues, and the persistence of COVID-19 suggests economic growth will be hard earned.

The economic data for Q3 of this year indicates a labour market that has held up remarkably well, with stronger-than-expected outturns across many key indicators. A strong policy response, adaptability of businesses, and a resilient workforce made this possible. However, further restrictions and the reintroduction of policy supports mean that uncertainty levels are higher than anticipated heading into the new year.

Talent remains top of the agenda

The performance of the labour market is perhaps the most notable feature of the pandemic recovery, with NI employment just 3% lower than pre-pandemic levels based on the latest Labour Force Survey (LFS) data. ROI employment has already exceeded pre-pandemic levels in aggregate. Combined with data on wage levels and vacancies, it paints a very competitive picture for organisations in the island economy in 2022. Migration levels remain constrained and the pool of domestic labour supply is shrinking. Businesses will have to look at new sources of talent, technological responses, and new ways of working to attract and retain the talent they need.

As we enter the final month of 2021, talent emerges as a top business challenge. Organisations will have to think creatively to attract and retain top talent, which may mean offering different types of contracts, blended working locations, and a renewed focus on core values. In 2022, wage pressures are likely to increase as the labour market tightens and employees gain more choice.

Prices present a headwind to growth

The headwinds of prices and labour shortages are partly a function of the resilience of the economy, but they are somewhat likely to dampen growth. A period of price increases was expected given the sharp falls experienced a year ago, but the critical question is whether they will be transitory or the start of a new, more worrying trend.

EY expects ROI inflation to average 3.3% in 2022. Thereafter, we expect it to remain above the low levels experienced in the last five years. In the UK, inflation is forecast to average 3.6% in 2022, and to revert to a medium-term trend of 2.1% thereafter.

However, in a higher inflation scenario, inflation is forecast at 4.5% in 2022 for ROI and 4.9% for the UK. This scenario assumes that the recent trend of elevated prices will continue into the first half of 2022, with sustained wage inflation, higher energy prices, and an increased costs of consumer goods due to new standards and policies.

The overall economic picture is one of a bounce back, although the experience of the pandemic has been vastly different across different cohorts of society. In particular, the hospitality and arts sectors face renewed job and business uncertainty following the latest COVID-19 restrictions in the run-up to what is typically a very busy period. The current period of sustained high inflation will also impact those on lower incomes disproportionately as staples such as food and fuel become less affordable.

Tomorrow not like yesterday

Sustained high levels of uncertainty make it increasingly imperative for businesses to scenario plan to ensure they are equipped to deal with a broad range of outcomes. It is perhaps time to ask whether many long-held macro assumptions are still valid. Will inflation and interest rates be forever low, will labour always be readily available, and will governments always be able to borrow what they need to support the economy? However broad and deep the risk register, we will always need the agility, flexibility, and resourcefulness to pivot and deal with the unforeseen.

What we have learnt in the past 21 months is that many long-held macroeconomic assumptions are now open to challenge. The economic environment is changing, and we cannot assume tomorrow will look or behave like yesterday. For this reason, it is important to celebrate success when it comes and use the skills and resilience built to help turn challenges into catalysts for growth.