Nest Egg: The ‘R’ word is back, but we’ve survived worse

There’s lots of recession talk around again and we seemed to have a decent few years’ where it had disappeared from conversation.

In Ireland, I feel we do like to think a recession is always just around the corner and we should almost feel guilty if the economy is doing too well.

The definition of a recession is two consecutive quarters of negative growth. It’s an economist’s definition and it doesn’t necessarily mean that we are going to have more than two consecutive poor quarters.

However, economies tend to act more like a large cargo ship or oil tanker trying to turn around a nimble little speedboat which can charge direction one hundred and eighty degrees quickly. The forces that cause an economy to go into recession usually stick around for a good few quarters and it can be difficult to turn things back positive again in an economy.

The US has technically gone into recession and the UK has done a spectacular job of shooting its own economy in both feet while its political landscape is also in a difficult situation.

In its July World Economic Outlook, the International Monetary Fund (IMF) pointed out that "a tentative recovery in 2021 has been followed by increasingly gloomy developments in 2022 as risks begin to materialise". It said that several shocks have hit a global economy that was already weakened by the pandemic. These shocks include higher-than-expected global inflation; tighter financial conditions; a worse-than-expected slowdown in China due to Covid-19 outbreaks and lockdowns; and further negative spill overs from the war in Ukraine. These are facts that cannot be argued with.

The IMF is warning that the risks to the outlook are "overwhelmingly tilted to the downside". Apart from all that has materialised over the past six months, the main risks include the war in Ukraine leading to a sudden cessation of European gas imports from Russia and that inflation could be more difficult than anticipated to bring down, either if labour markets are tighter than expected or inflation expectations un-anchor.

The risks also include rising global lending conditions (as interest rates rise to combat inflation) that could induce debt distress in emerging markets and developing economies; renewed Covid-19 outbreaks and lockdowns and a further escalation of the property crisis might further suppress Chinese growth. These global news stories are ominous, and it is very questionable as to how much longer the Irish economy can withstand these strengthening global economic and financial currents. A US recession could have some implications for US multinational investment here, but most would not have too many concerns for large multinationals who have deep pockets and strong pricing power.

In contrast, many would have much more concern about the challenges facing the diverse small and medium-sized enterprise sector (SMEs) here, which accounts for 99% of companies and around 65% of private sector employment. Those that export will obviously be affected by a slowdown or possible recessionary conditions in the markets into which they sell. Brexit is still impacting many SME’s and that may even get worse. There is also concern about the escalation of input costs (e.g. raw materials, energy, labour etc) and the limitations on the ability to pass on higher prices to consumers and other businesses that are being hammered by the cost-of-living crisis.

On input costs, energy and labour costs are the two most obvious challenges, but raw material costs in general seem to be under considerable pressure. On the financing side, interest rates are starting to rise and look certain to rise further as the ECB continues to turn the screw on inflation.

We’ve witnessed many slowdowns before but it’s worth remembering that they are seldom of the magnitude of the 2008 melt-down. That was caused by a huge global debt bubble bursting and global financial systems collapsing.

There are no such systemic issues at play this time that I’m aware of. Sure, property prices have risen too fast in a couple of years but very few respected economic commentators are calling for a collapse of economies, more of a gradual slowdown which is perfectly natural. Certain sectors will get hit harder than others which is also perfectly natural. If we do slip into a recession that lasts a few quarters or more, then we will re-emerge like we always do, and the building blocks of our economy should be on a much stronger footing than in 2007/2008.