How do we make sense of one of the most extraordinary economic years we have seen? Irish gross domestic product (GDP) data – the figures used to compare our performance with what happened elsewhere – suggests at a quick glance that the economy emerged relatively unscathed. But we know this isn’t the case.
Parts of the economy continued to grow, but other parts were completely devastated. Some people’s incomes held up or increased, but hundreds of thousands had to fall back on State support. And consumer spending, which accounts for half of all economic activity, collapsed by more than 13 per cent in the second and third quarters, compared with a year earlier. Above all we learned the hard lesson that you can’t just turn an economy off and then turn it on again without causing massive damage.
And the legacy of the shutdowns required to control Covid-19 is now the biggest concern as we head for 2021: the sectors that have remained largely open should be fine, but those that have had to close face a gradual reopening and the prospect of longer-term damage to companies and their employees.
Ireland has, for some years now, been a tale of two economies, but this has never been clearer than during the past year
When the Covid-19 story broke, the initial economic fears were about possible disruption to supply chains involving China, now one of the world’s most important manufacturing centres.
But as the story quickly developed, it was clear that more was on the way.
“This is 2008 again,” one Government source warned me at the time, as the shutdown commenced. And while the shape of what has happened was different, and the economy did not have the same fateful financial timebombs as it did a decade ago, the impact on some areas of the economy, notably consumer spending, has been much more dramatic,
That has been the defining factor of the extraordinary economic hit of 2020 – the pain has most definitely not been equally shared. Ireland has, for some years now, been a tale of two economies, but this has never been clearer than during the past year.
GDP, the traditional measure of the size of the economy, showed a big rebound of more than 11 per cent in the third quarter of 2020, as activity bounced back after the first lockdown. This more than offset falls in the first two quarters, and Davy stockbrokers now expect that GDP could expand by about 3 per cent for the year as a whole.
Is this a mirage, created by multinational accounting? Not entirely. Multinational exports, driven by pharma in particular, have had a decent year given the backdrop. In turn this has supported employment and earnings and given a welcome boost to tax revenues. Reports are that medical devices and pharma companies had a strong second half of the year in particular, benefiting from the full reopening of markets, and the resumption of something like normal medical activity internationally.
However, while the multinational sector thrived – and domestic manufacturing held its own – parts of the domestic economy collapsed due to the Covid-19 restrictions.
“The performance of Ireland’s export sector has been divorced from underlying domestic demand, which was still down 4.2 per cent in the second quarter and looks set to contract by 6 per cent in 2020,” according to Davy.
Within this decline are even bigger contractions in sectors like tourism and the arts, worst hit by the pandemic restrictions. Activity in the arts and entertainment sector, for example, was running 76 per cent below 2019 levels by the third quarter. Other sectors like retail have seen a saw tooth pattern of being forced to close, then reopen, then close again in the second lockdown, before reopening for Christmas.
In turn, the worst-affected sectors are key providers of jobs and incomes and have a vital role in the regional economy. So the economic pain of the pandemic has not been evenly shared.
The worst-hit sectors and their employees, however, have been supported by an unprecedented Government support programme centred on schemes such as the pandemic unemployment programme (PUP) and a range of business supports, including the wage subsidy scheme.
Many people still at work have felt it in their pockets. Earnings data shows that average earnings fell by just under 4 per cent between the first and third quarters of the year
In total, the Government calculates that the exchequer cost of the pandemic has been €20 billion, or €25 billion when contingent liabilities in areas like credit guarantee schemes are counted in. Add in another €12.5 billion allocated for 2021 and the total amounts to about 18 per cent of the annual size of the domestic economy.
Stronger than expected tax revenues mean that, despite this unprecedented programme, we will end the year with a deficit well under official forecasts of €20 billion and well below the worst fears of closer to €30 billion from earlier in the year.
However, the pandemic has still put a huge hole in the public finances, and financing this has only been possible due to huge support from the European Central Bank in the financial markets, buying roughly as much this year of Irish debt as the Government will raise in new borrowings itself.
The crisis has had a massive impact on the jobs market . The full impact is hard to judge, but with close to 500,000 people still on either the PUP or the Live Register and with high unemployment among young people in particular, we enter 2021 facing a jobs crisis.
Many of those on the PUP will go back to work – but many won’t. Job losses among those currently supported by the wage subsidy scheme are likely to be very significant, too, as sectors like retail and accommodation face more closures.
Many people still at work have felt it in their pockets. Earnings data shows that average earnings fell by just under 4 per cent between the first and third quarters of the year, similar to the hit to cash earnings during the 2008-2009 crisis.
In a post on the subject on the Irish economy blog, economist Reamonn Lydon points out that price changes are also important in assessing the real impact on purchasing power – during the financial crisis prices fell by more than 5 per cent between 2008 and 2010, cushioning the impact of lower wages.
This time, prices fell by about 1.5 per cent, which points to a fall of 2.5 per cent in real earnings. Of course during the last crisis households were hit by big tax hikes from 2010 onwards in particular.
Work by Economic and Social Research Institute economist Barra Roantree and others has pointed to the groups worst-affected by layoffs, drawing from PUP data and other sources. Those losing work during the pandemic are likely to be younger and less-well-off than the average, have limited savings and are much more likely to live in rented accommodation.
An ESRI report in December also showed they were more likely to be non-Irish nationals, with eastern Europeans particularly exposed. In contrast, other parts of the economy, the public sector, professional services, the digital economy and much of manufacturing have not been hit to anything like the same extent. In some cases, they have kept growing.
An upbeat forecast from Ibec that economic growth could exceed 5 per cent next year gives hope that there will indeed be a rebound in employment
Unlike the recession after 2008, the Covid crisis has not spread, as tax hikes and spending cuts have been avoided. And household and business balance sheets are in a generally better position now. That said, a significant minority have come under extreme financial pressure during the downturn – some 10 per cent of mortgage holders have been on payment breaks, for example.
The appearance of vaccines has changed the economic outlook – uncertainties remain about the speed of rollout and the possible need for another lockdown early in 2021. But now there is some kind of an end in sight, though what a “new normal” might look like remains fuzzy. Against this backdrop, the Government faces three big challenges.
1. Supporting the economy and those affected: There is no doubt that supports for businesses and people out of work due to Covid-19 will continue well into 2021. Sectors such as tourism, accommodation and the arts are deeply damaged and much of this is not temporary. Also, it remains unclear whether the way we spend in some of these sectors may change permanently – though this is the subject of much debate.
Crucially, a major programme of support will be needed to help those worst affected, particularly that group of younger, less-well-paid employees, many of whom will need help reskilling for areas where there are more jobs. An upbeat forecast from Ibec that economic growth could exceed 5 per cent next year gives hope that there will indeed be a rebound in employment, despite the twin issues of Covid-19 and Brexit.
2. Getting people to spend: Consumer spending collapsed during the 2020 downturn – because people couldn't spend in many cases, or were nervous to go out and also in some cases because of fear of job losses. About €11 billion was saved, and Ibec chief economist Gerard Brady says if this can be unleashed then 2021 could be a strong one for consumer spending, helping some of the sectors worst-hit by the pandemic.
A recent Central Bank paper points out that a fair amount of the saving is in better-off households – they can afford to spend, though traditionally they have spent less of disposable income than less well-off households. Engendering the confidence of people to spend is a big issue in 2021.
3. Public finances: The Government is to produce a plan in April including the longer-term outlook for the public finances. The Irish Fiscal Advisory Council has warned that it must outline how it plans to pay for its spending plans, which go well beyond the Covid-19 response measures. Its options in doing this will depend on how Covid-19 and Brexit play out next year – but with massive spending commitments in the pipeline, the politics of this are one to watch in early 2021.
