The extraordinary economic impact of the coronavirus is startling as the restrictions introduced on public health grounds lead to a major drop in demand across the Irish economy – and many others.
Trying to forecast where there is going is very difficult, but here are the questions which determine how this works out for the economy, for jobs and for our incomes.
These are, of course, secondary considerations to the public health outcome – in the short term, the sweeping restrictions will disrupt economies hugely, but success in controlling the virus is necessary for confidence to start to recover.
The scale of the possible short-term economic hit is extraordinary. We have no data yet, of course, but internationally forecasters are pencilling in annual declines of up to 15-20 per cent in the GDP of major economies in the second quarter of this year.
This will cause huge damage – but the really important question is what the third and fourth quarters look like . The depends on how long the restrictions last and what the world looks like when they start to be lifted.
Here, for the Irish economy, are the key questions.
1. Can parts of the economy continue to operate at a reasonable level?
We have seen tourism, which employs some 10 per cent of the workforce, being decimated, pubs all closed and closures sweeping across the non-food retail sector.
More than 50,000 applied for the new pandemic payment – paid by their employer to be refunded by the State – in the first few days it was available and over 300,000 could quickly either be on this payment or made redundant. On Thursday Minister for Social Protection Regina Doherty said that the final jobless tally from the crisis could even hit 400,000. This is a significant part of the 2.3 million workforce.
What about the rest of the economy? Most companies are going to face significant pressure as demand collapses here and across the world economy.
However they are not all facing the shutdown we are seeing in the pubs and retail sectors.
If major part of industry, construction and the multinational base can keep going it will maintain significant activity in the economy, as well as in some cases supplying key products and services. More than 400,00 are employed in the industry and construction sector, for example, and another 120,000 in ICT. The public service will reman operational, too.
There are some difficult issues here. Sources say some parts of the manufacturing and construction sectors are struggling to implement the two metre distancing requirement.
Discussions with governments and public health officials will try to find solutions.Widespread absences as more people get the virus or have to isolate will also be an issue.The impact of a wider shutdown – which may be in place for a period – remain unpredictable.Already service firms reliant on domestic spending – travel agents, lawyers, accountants and so on are facing major falls in demand. And the collapse in demand worldwide will affect many more.
It is vital for the wider economy and for the public finances that we keep as much of the economy going as possible – provided this can be done without endangering the health of those involved.
2.How long will it last?
This is the most vital question and the hardest to answers. The scale of the crisis means permanent damage will be done – jobs will be lost that will not be regained, at least quickly. Lost spending will not all be replaced – even if there is some catch-up spending when this is all over. It is impossible at this stage to estimate what Irish GDP might look like this year, but a massive fall in activity is underway.
Talk in the early days of the crisis about a V shaped hit on the international economy – a quick, steep fall followed by a quick recovery – now looks hopelessly optimistic.
That said, forecasters in JP Morgan, the investment bank, have predicted an extraordinary decline and then rebound in economic activity this year. For the US they see an annualised fall of 14 per cent in GDP in the second quarter, followed by a a jump of 8 per cent in quarter three, and 4 per cent in quarter four. On their forecasts GDP for the full year would be down just 1.8 per cent. This looks very optimistic.
Their forecasters for the euro zone are even more extraordinary, with GDP set to fall by 15 per cent in the first quarter and 22 per cent in the second quarter, before a massive rebound in quarter three. This reflects in large part the extraordinary restrictions in Italy, Spain and now France.
Given the uncertainties we still face, a huge bounceback in the later part of the year looks unlikely. But who knows ? The analysis by JP Morgan is based on the expectation that most of the current restrictions and the requirement for social distancing will be lifted by the summer.
This timescale issue is vital for businesses and is likely to provide difficult decisions for governments worldwide in the months ahead. When will it be safe to ease the restrictions?
Will it be a case of a gradual easing with some restrictions remaining in place for longer?
Or might there be waves of restrictions through the year? These are impossible questions to answer now – making life very difficult for businesses trying to survive and for governments planning their response.
3. How do governments and central banks respond?
There has been a massive wave of announcements from governments and central banks over the past week, most recently Wednesday’s ECB decision to signal that it is prepared to buy €750 billion in government and corporate bonds. This is important as euro zone governments,including our own, will have to borrow billions on the markets to fund higher government spending on health, business supports, helping affected employees and so on.
And the ECB move will, if it works, help them to borrow this money at lower interest rates.
These moves are on an unprecedented scale and speed ad indicate that lessons were learned from the crisis after 2008, when policymakers tardy and inadequate response creating huge problems
Government and central bank policies are vital for a few reasons. Higher government spending is obviously needed to address the key areas of need – healthcare, businesses in trouble and their employees.
The economic goal is to try to limit the long-term damage – in the hope that when this is over, many businesses can reopen and rehire. The uncertain length of the health emergency makes this a real challenge. Here the Government has announced an initial package of €3 billion but it is inevitable now that much more is to come.
The US and UK governments have announced massive packages and the big euro zone economies are also planning huge programmes.
Higher government spending can also replace some – though far from all – of the demand being lost as spending crashes. Again this can help to avoid turning an inevitable and sharp recession into something deeper and more dangerous by supporting confidence to some extent and giving people hope of recovery when the health crisis starts to ease.
Finally, a vital goal of policy is to stop the an economic crisis turning into a full-scale financial crisis, with pressure on the banks, problems in financial markets and a drying up of credit.
Trying to avoid this is why central banks, in particular, have moved so fast, trying to support the flow of credit in the markets and avoid the kind of “gumming up” which caused so much damage during the crisis.
For the ECB, in particular, fighting off fears of another euro zone crisis and avoiding a sharp rise in borrowing costs for troubled economies, notably Italy and Spain, is vital . Hence the “ bazooka” which was unveiled yesterday.
The ECB said it would not “tolerate” any disruption which limited the transmission of its easing policies across the EU. This calmed the markets a bit today – but who knows what lies ahead.
