The Irish Times view on the state of the economy: Time to plot a course out of the crisis

It has been an extraordinary and deeply unsettling couple of months – and the economic impact of the Covid-19 crisis has been enormous. Recessions normally play out over a period of years, but we have seen one happen over just a few weeks. To pretend to know with any certainty what happens next would be foolhardy and Minister for Finance Paschal Donohoe, in presenting the first official forecasts of the impact of Covid-19, was correct to underline the uncertainties. All we can really do is look at plausible scenarios, try to minimise the immediate damage and then start to plan our way out of this.

The numbers in the stability programme update are shocking nonetheless. The economy, as measured by Gross Domestic Product, could shrink by 10.5 per cent this year, with the vast bulk of the damage being done in the second quarter. A slow pick-up later this year, as restrictions are lifted, could lead to a return to six per cent growth next year.

There are risks, which break down into two broad categories. One is the obvious one – that the restrictions remain in place for a longer period, or are reimposed as new waves of the virus hit. The department made some estimates of the impact of this – GDP could plausibly drop by 15 per cent this year, for example. This would increase the permanent, or structural, damage to the economy and the level of threat to the exchequer finances. For the moment Ireland can continue to borrow cheaply, partly due to the help of the European Central Bank, but we have seen before how quickly the markets can turn.

The second, related, risk is of some threat from international, or financial markets. Nerves could impact on the performance of the euro zone, for example, with the outlook for Italy particularly uncertain. Or even if Ireland succeeds in getting the virus under control, other countries might not. The document also refers to the risk of changing patterns of foreign direct investment. Big economic shocks can lead to knock-on economic and political upheaval.

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There are a few policy implications. One is the need to minimise the initial damage – Donohoe was correct to move on the income support and wage subsidy schemes. Designing a wider programme to assist companies hit by a cash shortage and a threat to their solvency is also required – and this will not be easy.

There is also an urgent need to get on and form a new government. There is much work to be done, including finalising a national recovery programme. It will not be easy work – and tough decisions lie ahead in easing restrictions, on the public finances and in starting recovery. But it is at such times that governments can make a difference and the delay in forming a new administration cannot be allowed to continue for much longer. There is work to be done.