Cliff Taylor: Can the Irish economy cope with another variant?

The bounceback of the Irish economy in recent months has been extraordinary. The latest – and most important – evidence came in the figures for the jobs market this week which showed that employment and working hours were back to pre-pandemic levels. Given that parts of the economy are operating below capacity, this is remarkable. In fact right across different sectors there are real labour shortages of a kind rarely seen.

We have learned during the pandemic that much of the economy can continue pretty much regardless. And we have also seen the huge exposure of the hospitality, travel and entertainment sectors in particular. Many of these reopened successfully, and are now hit again by cancellations and the return of working from home.

And as if we needed reminding of the uncertainties caused by the Covid-19 virus , we now have news of a new variant. International stockmarkets reflected real concern about this on Friday, as did Government Ministers and health experts here and internationally.

How to support the hardest hit sectors will be a big issue if the new variant does bring more serious problems

For Ireland, with a high level of virus in circulation, this is likely to tilt the balance in the short term towards some tightening of restrictions and cautionary advice along the lines of what was already in the pipeline. Beyond that we just don't know. With delays now in providing tests, trying to monitor the movement of a new variant were it to enter Ireland would be very difficult. The imperative to reduce virus numbers has just increased. But we have a lot to learn about the new variant and we will just have to wait and see.

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The domestic economy – already under pressure as restaurant and hotel bookings are cancelled – will remain in the firing line. Ironically, these sectors have a big conundrum. They had reopened quite well and faced huge problems in finding and retaining staff as the economy faces the most extraordinary jobs shortage in living memory.

Now we find ourselves in the weird economic position where businesses are simultaneously considering how to deal with falling revenues and how to hold on to staff in the hope that things will revive next year. The wage subsidy scheme – which has provided vital support – will help, and there may well be pressure to retain it at current levels. How to support the hardest hit sectors will be a big issue if the new variant does bring more serious problems, but we don’t know yet that this will happen.

For governments, responding to the new variant involves more than a little guesswork. We don’t yet know the full facts about it, nor how widely spread it is across the world. So trying to strike a balance in terms of what restrictions or rules to introduce is really difficult. Travel controls are the obvious short-term measures, but how do you judge what else to do?

The new variant again underlines the longer-term uncertainties facing much of the economy – particularly travel and tourism

In his book Shutdown, which looks at the first year of the pandemic, author Adam Tooze wrote about how difficult it was to even come up with a framework within which to make decisions in the early days of the pandemic. "We struggled to decide how to decide", as he put it as the right strategies were unclear and the trade-offs hard to frame.

Nearly a year later we know a good deal more but the decisions don’t seem any easier. The questions may have changed, but finding some equilibrium for “living with Covid” , as one iteration of the Government Covid plan was called, still seems a long way off.

In terms of the economic impact, we have learned some important things. One is the resilient performance of the economy, supported by the emergency Government measures. Even counting in the 50,000 or so still on the PUP, the unemployment rate is now below 8 per cent, a lot lower than would have been feared.

It is impossible to know now what may be needed to respond to the new variant but the playbook in terms of supports is there if needed. And so is the cash given that State borrowing this year will be way lower than expected.

The new variant again underlines the longer-term uncertainties facing much of the economy – particularly travel and tourism, but also hospitality and entertainment and anywhere people gather.

In contrast to many younger people working in exposed sectors, many generally better-off households have built their wealth

The pieces are in place for growth to pick up, but we can now see the uncertainties. We hope the boosters can help to restore some kind of normal trading and activity across the domestic economy, though we just don’t know.

Meanwhile recent Central Bank figures showed the extraordinary level of wealth, now approaching €1 trillion, owned by Irish households, boosted this year by rising stockmarket values and housing wealth. In contrast to many younger people working in exposed sectors, many generally better-off households have built their wealth, with markets for assets like houses and shares boosted by massive Central Bank printing of money.

A significant portion of the additional savings built up in bank accounts will be spent if the opportunity is there do to so, potentially benefiting the domestic economy. But if restrictions remain and people fear going out or travelling, the cash will just keep building up.

Long Covid now looks set to be an economic as well as a health phenomenon. All the much-discussed issues of trying to keep the virus under control – vaccines, testing, ventilation, behaviour and so on– remain in play, but a long-term plan remains elusive.

Can we actually develop a plan to live with Covid or are we destined to be thrown from one wave to the next?

The resilience of the economy – and the strength of the jobs market – gives us much cause for optimism. But we are again being reminded that the challenges of the pandemic remain significant. Both in terms of policy and our own heads, dealing with uncertainty is part of the wider strategy we need to develop to live with the virus.