Gerard Brady: Prices are likely to stay stubbornly high

Commodity prices are well down on their peak in 2022 but are still almost a third higher than they were in 2019. Picture: Alan Hamilton

Over recent months, some global forecasters — most notably the International Monetary Fund (IMF) — have begun using a phrase to describe the current global economic outlook which will awaken a deep sense of unease in most Irish people.

In their view, the global economy is on its way toward a “soft landing”. Focusing too much on short-term landing points now, and ignoring the big structural changes underway, would also be a mistake.

It would miss the big story in global economy in 2024, that we are now in a period of rapid and accelerating change.

Much in the same way that many people’s day-to-day lives are a lot different than they were before covid, so too is the global economy. The move in European interest rates to 4.5%, from initial rates of close to zero, in the two years was the fastest increase in interest rates we have seen since the 1970s.

Whilst rates are still very low in a historical context, what matters for the economy is the pace of change as well as the level. The last decade was the first era of zero or negative interest rates in recorded history, going back to the Middle Ages. It is very likely that the era of cheap money is behind us.

Some business models that grew up in that era have struggled to adjust. For example, parts of the tech industry that put investing in rapid growth ahead of achieving profitability have had to cut back. However, overall business investment across most of the world continues to grow robustly.

This is down to major changes in how governments compete for investment.

China exported 5.2m cares last year, up from around 1m a year in 2019 - passing out Germany and Japan as the world's largest car exporter. Picture: John Walton

Throughout most of the last 40 years, the use of industrial policy — where governments overtly backed specific industries — has played second fiddle to open markets. That is changing. 

The US, with its Inflation Reduction Act and CHIPS Act aimed at boosting manufacturing, is now more involved in subsidising industries than it has been in decades. The collapse in investment in the Chinese real estate market has also seen it heavily subsidise its exporting industries in similar areas, such as batteries and electric vehicles to compensate.

China exported 5.2m cars last year, up from around 1m a year in 2019 — passing out Germany and Japan as the world’s largest exporter of cars in the process. Europe is well behind the other two major economic blocks, but slowly moving in the same direction. On top of this, change in global supply chains is accelerating.

Commodity prices, which drive the price of every other physical thing we buy, are well down on their peak in 2022 — but are still almost a third higher than they were in 2019.

Prices in commodities will remain higher and more volatile in the coming years due to geopolitical tensions.

The falling levels of trade openness and rising geo-political risk means that there will be more frequent disruptions to global supply chains and less integrated trade. In turn, inflation and costs for business will remain more volatile.

The rise of state driven competition for investment, rising geo-political tensions, and falling trade openness is not good for small countries such as Ireland. We will never be able to compete with larger countries when it comes to subsidies, and have benefitted enormously from global trade integration.

We need to be laser focused on competing where the global economy is seeing the benefits of this era of rapid change.

For one, the advancement in artificial intelligence (AI)  feels like a generational technology. Ireland has strengths in data and digital, but it will require significant investment to harness its transformative potential.

At the same time, climate change and the net zero transition are driving a focus of major industrial investors on access to abundant and affordable clean energy and water. We have more natural resources in wind and water than most, if we can build the infrastructure to harness them.

If we want to guarantee high living standards into the future, then we have an opportunity in this year of elections to look past the short-term landing point and embrace a period of accelerated change.

• Gerard Brady is chief economist at Ibec.