Meeting the inflation challenge

Economist Jim Power says 2022 has been a “very challenging year globally”.

“We have dramatic headwinds at international level, the global economy is slowing and inflation is at the highest level in 30-40 years depending on which country you are looking at,” he says. “Interest rates are rising aggressively from historically low levels and the Ukraine war is ongoing with energy prices extremely high.”

Despite this “extremely challenging external environment”, Ireland has, to date, remained somewhat insulated, with a bustling economy, ongoing foreign direct investment (FDI), a strong labour market and healthy public finances. But despite this stubbornly positive picture, Power says we are now beginning to witness some early signs of stress.

“Consumer confidence is at very low levels and that is now starting to translate into consumer spending which is definitely weakening,” he says. “With Christmas approaching there was a strong spending season but I would worry about the early months of next year as spending could weaken significantly and people could become a lot more cautious.” At-risk sectors include hospitality and retail “and indeed any sector that’s dependent on discretionary spending”, he notes.

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Always in an economic downturn, the first thing to go is the spend on advertising and marketing

—  Jim Power, economist

Colette Devey, partner and head of consumer products and retail at EY Ireland, says it expects to see consumer caution continue through the festive period and into 2023, with discretionary spend being most heavily impacted.

“This has had a direct impact on the top line for many consumer-facing organisations as they face lower sales and/or an inability to pass through the increases in underlying costs that they are facing from their own suppliers,” she says. “In addition, reduced consumer spend has also resulted in a build-up of inventory.” This creates cash flow challenges, in addition to the margin/profit impacts that many businesses are experiencing, she says.

Power says businesses are already responding to these challenges in different ways. “There are clear signs of more cautious investment – even if you look at the sales of commercial vehicles, they have weakened considerably in recent months and that’s a clear indicator of what’s happening at the SME level,” he says. Anecdotally, he has heard reports that marketing budgets are being trimmed. “Always in an economic downturn, the first thing to go is the spend on advertising and marketing.”

Yet a huge challenge for businesses struggling to cope with rising costs and reduced consumer demand is what to do with their skilled workforces. Businesses are reluctant to let workers go, Power says.

“Demand out there has weakened but it is still strong and the labour market is still extremely tight, so letting workers go could be a serious business mistake. So for now there is still a ‘wait and see’ attitude.” Businesses are being cautious, but it is a “cautious caution”, he suggests.

One in three survey respondents indicated that they will spend more on vacations and activities outside the home in 2023

—  Colette Devey, EY Ireland

Consumer-facing businesses are also getting creative. One way is by establishing customer and brand loyalty, for example, through the use of reward and loyalty schemes, Devey says. Those who love the January sales will be pleased – as businesses try to clear out old inventory and improve their cash flow position, heavy discounts will likely be on offer, she adds.

And it isn’t all bad news. EY has been tracking consumer behaviour since the start of the pandemic. Its most recent Future Consumer Index report, issued in November, found that, despite the gloomy economic picture, consumers remain optimistic about the future, and 74 per cent are looking forward to getting “back to normal” after the disruption of the pandemic.

“While many survey respondents feel very concerned about the rising cost of living, 59 per cent said they feel in control of their lives and are eager to catch up on experiences they missed out on due to the pandemic – one in three indicated that they will spend more on vacations and activities outside the home in 2023,” says Devey.

“Our survey also identified that there is a cohort of consumers who have fewer financial worries but will exercise discretion in their spending, driven by a desire to live more sustainably – in some instances may result in spending less in an effort to consume less and create less waste, but in many instances spending the same or indeed more on products that align to their eco-values.”