Coronavirus and the economy – what if it’s not as bad as we fear?

The race to produce a vaccine against Covid-19 is well and truly on. On its progress rests the outlook for the world economy and the fate of thousands of businesses internationally – and in Ireland. Without knowing whether a vaccine will appear, when it might be available and how well it will work, government policies to support businesses inevitably involves shooting in the dark. But it is worth asking the question – what should we be doing to prepare, in case the more optimistic scenario of a viable vaccine presents itself some time as we move into 2021? And how should policy remain flexible to cover as many possible outcomes as possible?

1. Forecasting in a fog

Pretty much all economic forecasters have given up trying to come up with precise estimates and instead are looking at “scenarios” involving various combinations of events – subsequent waves of the virus, the appearance of a vaccine and so on.

The “right answers” in terms of how governments should support businesses change, depending on what is judged the most likely outcome. If a vaccine were to appear, even if it does not return life immediately to the way it was before, this clearly offers hope to many consumer-facing businesses that much of the current shock they are facing is temporary – a bit like an economic cycle which comes and goes, albeit a hugely disruptive one.

On the other hand, if an effective vaccine does not become generally available, then the structure of many industries is likely to change and more businesses will go bust, no matter what State supports they get. Consumer behaviour will change more fundamentally as we adapt to live “with the virus”.

Coronavirus: Victoria to make masks compulsory amid spike in cases

---

Coronavirus: California, Florida and Texas set one-day fatality records

---

No positive results from Munster and Leinster’s second round of Covid-19 tests

---

Covid plunges German economy into record slump

---

Of course there are a range of middle roads – for example there could be more progress in developing treatments, even if a working vaccine remains elusive. And as we understand better how the virus is transmitted, we may be able to handle it in a less economically disruptive way.

So far, the evidence from developed economies, including Ireland, is of a strong enough initial bounce back as activity restarts, but with doubts about how sustainable this trend can be. In June, Irish retail sales jumped and on a monthly basis were slightly above what they were in February, before the crisis. There is, no doubt, some catch-up spending here. Sales in sectors such as bars remain, not surprisingly decimated.

The latest euro zone data shows some shakiness in consumer sentiment – which had recovered in recent months – probably caused by outbreaks of the virus, fuelling fears that the recovery could stall. And across the EU there are fears about rising unemployment as many businesses run out of road.

2.The policy dilemma, and the optimistic scenario

There is a clear difference in the policies that might be appropriate depending on how the virus story plays out. But as we don’t know what will happen, policy has to stay flexible.

If there is going to be a vaccine in the near(ish) future, then it makes sense to keep as many businesses going as possible, even if some just tick over for now. And perhaps even to plan for some to stay closed but be able to reopen in time.

But if the virus crisis drags on, then governments will be faced with a bigger crisis in the consumer-facing sectors – tourism, hospitality, events , retail and so on – where more companies will not make it and others will need help to restructure. Policy would need to help people to retrain and move from these sectors to others where there is more work – which is not an easy task. Some sectors would shrink in size.

For now, amidst ongoing uncertainty, governments have to try to ride two horses and wait and see what happens.

In a recent paper on the UK situation, John Springford, deputy director of the UK think-tank, the Centre for European Reform, argued that "recent medical advances should tilt government towards continued support for workers and companies because the pandemic may be over sooner than they had feared." If support is withdrawn too quickly, he warned, then "a wave of bankruptcies and unemployment"will follow in consumer-facing sectors .

What exactly a vaccine would mean to economic activity would depend on its availability, its coverage and its reliability. For now Springford argues that there is a strong argument for continuing to support companies which are not viable now, but could be with a vaccine, as reports come in of progress in developing one.

Many of these companies are now doing little more than ticking over. Where many would be without a vaccine remains uncertain. And this comes down to consumer preferences, not government closure orders.

In the case of restaurants, for example, ESRI behavioural economist Dr Pete Lunn says that many people may now be avoiding them because they feel they cannot offer a relaxing experience – "you don't just pay for the food". The question, without a vaccine, is the extent to which people gradually get used to – and feel safe with – a new kind of restaurant experience. Lunn says that in time people can get used to new environments and some will likely start drifting back. But for businesspeople, looking to put a hard number on issues such as headcount and turnover, this is difficult.

3. The Irish response

Like most other EU countries, the Republic has focused supports on the jobs market and keeping people in work, or at least attached to their employer. The recent extension of the wage subsidy scheme to next April thus keeps policy options open by keeping many firms ticking over and allowing others to avoid redundancies.

Estimates from the Government, the Central Bank, IFAC and the ESRI all see the likelihood of a significant bounceback in the economy next year in the more benign scenario where a vaccine appears. Some sectors – such as travel and tourism – could still require further support. And unemployment would be higher as some firms will not have survived – so policy would also have to focus on areas such as retraining and helping people to find work.

The extension of the wage subsidy, on a slightly different basis, until April 2021 allows time for the judgments to be made on the likely path of the virus. By contrast, the UK " furlough" scheme is to end in October, with the chancellor Rishi Sunak saying extending it further risks leaving people trapped" in a job which could only exist because of a government subsidy.

However, the UK National Institute for Economic and Social Research has warned that this risks eliminating it too early and could push up unemployment. Extending it until the middle of next year, according to NIESR, would probably almost pay for itself. Germany and France are also extending similar supports to the end of this year or into 2021.

In the Irish stimulus plan, the wage subsidy extension was accompanied by a range of other measures, including an increase in cash grants for SMEs, changes to tax rules on how losses are dealt with by companies and the self-employed and an extension of relief on rates. These are all designed to help companies get through to next year; they are intended as temporary supports, targeted at where they are needed.

Some SME lobbyists argue more will be needed. The extension of the cash grant to a maximum of €25,000 is significant , to give one example, but the support is still confined to rate-paying companies. Some specific supports for the worst hit sectors may also be needed – again the call will be where to direct the money to most effect.

In a document published after the stimulus programme, the Government outlined the rationale, as it saw it. The goal of the wage subsidy programme was to keep people in work and attached to their employer and ensure less drift into unemployment. For employers, it allows them to retain staff and avoid having to rehire and retrain, and for employees it avoids unemployment and potentially significant career costs.

However, the document cautions that in the longer term, policy cannot keep unviable firms alive or support “zombie” companies with no future.

“If a shock is permanent,” the document says, “ then it is necessary to facilitate the transition of firms and workers from shrinking sectors to expanding sectors.”

There is no role for policy in propping up low productive activity in areas “from which demand has permanently shifted.” Instead the job of policy is to give employees the “tools and skills” to find new jobs in growing sectors .

At some stage, the call will have to be made on where further support is to be directed. A lot will come back to the question of whether a viable vaccine is in the pipeline. If it is, then 2021 could indeed see a decent recovery, albeit one against the backdrop of a significantly higher unemployment rate. If not, then the road back looks longer and more difficult.